A Tribute to the Thoughts of Another and his Friend"Everyone knows where we have been. Let's see where we are going!" -Another

Saturday, May 5, 2012

Inflation or Hyperinflation?

Whilst discussing the demise of the Canadian penny in front of a Congressional panel, Fed Chairman Ben Bernanke demonstrates that "transactional currency is simply a notional, purely symbolic token medium of exchange, much more replaceable, resource-efficient and environmentally friendly than mining stupid metals for stupid coins."
(NotReal News)

Remember my post around this same time last year titled Deflation or Hyperinflation? At that time, the debate between deflation and hyperinflation was all the rage, and so I wrote a post to a prominent and long-time deflationist named Rick Ackerman, who later stopped by in the comments. In fact, most of my hyperinflation posts have been written in the context of the deflationists' arguments.

I can't say that the debate has shifted from deflation to inflation over the last year, but it sure seems that the arguments coming across my desk these days are for rising inflation with the exclusion of hyperinflation. My position hasn't changed. But this does give me the opportunity to present my position against a different premise, that of inflation without currency collapse. I would guess that some of you will have a completely different view of hyperinflation by the time you finish this post. If so, please let me know in the comments.

But first I need to make it clear once again that this hyperinflation discussion is not about timing. It’s about how it all ends, and it’s better (for a saver) to be a decade too early than a minute too late. The other side (whoever it may be) often tries to make the debate about timing. It is not about timing and I don't do timing, but that doesn't mean the end is far away. If anything, it's overdue in the same way a big earthquake can be overdue. In 'Deflation or Hyperinflation?' I wrote:

The whole point of the [hyperinflation] debate is about the denouement, the final outcome of this 100-year dollar experiment. It is about the ultimate end, and the debate has been going on ever since the 70s when the dollar was separated from gold and it became clear that there would be an end. The debate is about determining the best stance someone should take who has plenty of net worth. And I do mean PLENTY. People of modest net worth, like me, can of course participate in the debate. But then it can become confusing at times when we think about shortages or supply disruptions of necessities like food. Of course you need to look out for life's necessities first and foremost. But beyond that, there is real value to be gained by truly understanding this debate.

Here is FOA on timing, from a post in which he specifically predicted dollar "hyper price inflation":

Timing?

We, and I, as physical gold advocates, don't need timing for this position! Timing is for poor, paper traders. We are neither and our solid, long term, one call over several years to hold physical gold will confirm our reasoning. There is no stress for me to own this ancient asset as it is in a good proportion to all my other wealth.

There is no trading an economic system whose currency is ending its timeline. Smart, quick talking players will joke at our expense until fast markets and locked down paper gold positions block their "trading even" move into physical at any relative cheap price. Mine owners will see any near term profits evaporate into a government induced pricing contango that constrains stock equity with forced selling at paper gold prices.

My personal view

They will, one day in the future, helplessly watch their investments fall far behind a world free market price for physical gold. Further into the future, one day, mines will make money on the last thousand per ounce price for gold; only the first $XX,000.00 of price will not be available to them.

Yup, that was back in October of 2001. Bad timing? How have your mining stocks done lately? I know of one FOA reader who went "all in" with gold coins that year to the tune of somewhere around $400K. He had just retired from his previous life as a trader. Today his golden nest egg is worth $2 million, and he has been living off of it for most of that time! So much for bad timing, eh?

My argument for hyperinflation is FOA's argument. So you'll see me use FOA's terms. You'll see me quote a lot of FOA. And you'll see me restate the same call he made back in 2001. His call was clear and unchanging. His argument wasn't wrong then and it is even more pressing today, which I will explain. And just to be clear about FOA's call, here it is from that same post:

"While others call, once again, for a little bit of 5, 10, 15% price inflation, that lasts until the fed can once again get it under control,,,,,,,,, I call for a complete, currency killing, inflation process that runs until the dollar resembles some South American Peso!"

"Complete, currency killing" hyperinflation is a one-time event. In a moment I'll explain the reasoning behind this call and why it still stands. But first, let's take a look at a couple of the "inflation but not hyperinflation" arguments that have come into my sights.

"An Adult Approach"

In An Adult Approach – II (Defining Relative Real Value) Lee Quaintance and Paul Brodsky of QB Asset Management (or QBAMCO) laid out a nice argument for what sounds a lot like FOA's front lawn dump but without the "complete, currency killing" hyperinflation. In it, they explained that the process of "re-collateralizing unreserved credit" which began in 2008 will likely end with all of the assets backing today's bank money being replaced with new base money.

In other words, US dollar monetary base (today at around $2.6T) will be increased to cover and replace today's US bank assets (almost $20T). But they aren't predicting that the entire money supply will become base money, as happens during hyperinflation. Instead, they think that as credit money has all but been replaced with base money, "bank animal spirits will once again take over and we will have a new leveraging cycle." They provided the following conceptual illustration to help us visualize what they are projecting:

Then they ask (and answer), "Will the lines meet or cross? We don’t believe so…" I'm going to give you a longer excerpt, but I wanted to highlight this point first, because it is where my view differs from their view. The lines meeting and crossing is exactly what it looks like during hyperinflation, when bank credit disappears (because price inflation is running too hot to issue credit at any practical interest rate) and the entire money supply becomes base money in amounts which overtake the previous amount of credit money. The lines meeting and crossing could look something like this conceptual illustration (by DP):

Here is part of FOA's famous front lawn dump:

"My friend, debt is the very essence of fiat. As debt defaults, fiat is destroyed… hyperinflation is the process of saving debt at all costs, even buying it outright for cash… because policy will allow the printing of cash, if necessary, to cover every last bit of debt and dumping it on your front lawn!"

So their thesis is that the Fed buys almost all of today's bank assets (debt) for cash, but then during this process the banks, now almost fully reserved, start lending again and a new credit cycle begins without a systemic collapse. And what this will do to prices is deliver "a higher General Price Level" and "a CPI rate higher than the rate at which the GPL rises." I emailed with Paul about this call being much more tame than some things he has written in the past and he wrote back that he thinks my hyperinflation projection is "a very fat-tailed event" while they are "trying to be much more moderate in [their] projections."

I hope to show in this post that avoiding this "fat-tailed event" is the most unlikely scenario. It is not just about the gap between unreserved deposits and base money and bank levering/de-levering cycles. It is about a currency that has reached the end of its timeline when the removal of structural support (an FOA term) meets the largest spending/dollar-emitting machine the world has ever known. But first, here's a more complete excerpt from their paper, or you can read the whole thing at the link:

Magnitude of the Problem

Central bankers struck a match under the global economy in 1981 and it continues to burn. The match began to burn their fingers in 2008 when the process of “re-collateralizing” unreserved credit got underway.

The familiar graph above shows the increase in USD base money that began to de-lever the US banking system in 2008. Though we have written in the past about total dollar-denominated debt exceeding $50 trillion, all of that debt does not have to be paid down. (Most of it is fully-reserved because its creditors are not levered.) But there is an identifiable portion of dollar–denominated debt issued by highly levered creditors – banks.

We believe the debt-to-money gap that must and will be greatly reconciled in short order is the ratio of bank assets to the monetary base. As the graph below shows, the US Monetary Base was only 13% of US Bank Assets on December 31, 2011.The banking system is the source of unreserved credit and is on the hook to use its collective balance sheet to be the transfer mechanism for economic stimulation through monetary policy. And as they have already demonstrated repeatedly, monetary policy makers feel the need to de-lever the banking system today so it may then extend credit to the rest of the economy tomorrow.

Of course, the US banking system is not alone. According to the Financial Stability Board, worldwide bank assets (including US bank assets) were approximately $95 trillion in October 2011 (USD terms). Meanwhile the IMF reported that as of December 2010 the global supply of base money was approximately $12 trillion (USD terms). These figures put the worldwide proportion of base money-to-bank leverage roughly in line with the US.

Given: 1) the exorbitant leverage currently in the global banking system, 2) current negative real output growth in developed economies, 3) current negative real interest rates, 4) uniformly poor monetary, fiscal and demographic conditions across most developed economies, and 5) already wary populations beginning to get restless; we have difficulty imagining that global banks, labor, savers, politicians and investors will be able to endure current conditions much longer before demanding the financial reset button be pressed to complete bank de-levering.

We provide the graph below merely to make it easier to conceptualize the nature of such a de-levering, as we see it. (This is not necessarily a prediction of timing or magnitude.) The takeaway is that base money (in the form of physical currency in circulation) and bank deposits will have to rise at a much steeper rate than bank assets until the banking system is more fully reserved. (At some point we think bank animal spirits will once again take over and we will have a new leveraging cycle.)

The graph above illustrates the forces behind a high-tech jubilee. The burden of repaying past systemic debt will have been greatly reduced through base money inflation, (that shifts the GPL [General Price Level] higher, including revenues and wages), while the integrity of systemic debt remains intact (nominally). The integrity of the banking system will also remain intact, as would the creditworthiness of most debtors.

So we anticipate the sum of physical currency and bank deposits to continue to rise to stimulate nominal GDP growth and the ratio of bank credit-to-base money to contract further. Will the lines meet or cross? We don’t believe so but we do think the gap will narrow substantially before bank assets can grow materially again. Thus, we expect the rate of change of the General Price Level to equal the rate of change of the sum of physical currency and bank credit LESS some accommodation for productivity gains. It is reasonable to expect:

1) A higher General Price Level

2) A CPI rate higher than the rate at which the GPL rises

3) Levered asset inflation rates that very likely will be nominally positive but negative in GPL terms and, even more so in CPI terms

"Merely Strong Inflation"

Another "inflation but not hyperinflation" post which crossed my path the other day was Get Ready for 'Hot' Inflation by Gregor Macdonald. In it he writes:

Ideological deflationists and inflationists alike find themselves both facing the same problem. The former still carry the torch for a vicious deflationary juggernaut sure to overpower the actions of the mightiest central banks on the planet. The latter keep expecting not merely a strong inflation but a breakout of hyperinflation.

Neither has occurred, and the question is, why not?

The answer is a 'cold' inflation, marked by a steady loss of purchasing power that has progressed through Western economies, not merely over the past few years but over the past decade. Moreover, perhaps it’s also the case that complacency in the face of empirical data (heavily-manipulated, many would argue), support has grown up around ongoing “benign” inflation.

If so, Western economies face an unpriced risk now, not from spiraling deflation, nor hyperinflation, but rather from the breakout of a (merely) strong inflation.

"Because the subject is so vast, and because I'd like to make a comment that is useful, I'll just respond briefly to FOFOA on his remarks regarding my present concern for a strong inflation, and my lack of concern for a spiraling deflation or hyperinflation...

So, while there are many components required to foster/create/spark either strong inflation or hyperinflation--which have been discussed and articulated historically in the corpus of work done on the subject--there is in my opinion one factor, and one factor alone, that *must* be present in all hyperinflations. And that factor is the social, behavioral component in which the users of the currency *must* cross a tipping point where they are inclined to effectively throw the currency away, in exchange for any other good or currency, at some notable rate of speed. Without this behavioral shift, without this social decision, without the psychological change in perception that leads to this type of crowd behavior, there will be no hyperinflation.

So, you won't find me predicting USD-zone hyperinflation or even the risk of such any time soon, because the requisite social-psychological shift is a large and heavy object that needs a collapse in confidence to move from its current state of inertia.

Instead, I am genuinely concerned with a breakout of strong inflation, owing to a convergence of very large global trends: primarily the reaching of the Lewis Turning Point in non-OECD countries, and the relentless advance of resource scarcity. OECD currency users, meanwhile, from Japan to Europe to the US remain largely trapped within their currencies and their sovereign bonds, and will remain trapped in these until they aren't.

True, nothing goes on forever. Wake me when the managers of trillions of OECD pension assets panic out of their own currencies, and their own sovereign bonds, and I will finally be willing to entertain the risk of hyperinflation in OECD currency zones: EUR, JPY, USD. Perhaps this happens sooner than I anticipate. But I wager that it happens much later than most anticipate.

G"

There are three good points in Gregor's reply which I want to address, so I'll just list them out right here:

1. A psychological tipping point must be present in all hyperinflations. Me: But is this mass-psychological tipping point the cause, or simply a visible effect (symptom) that is sometimes mistaken as the cause? A loss of consciousness is also present in all deaths.

2. A social-psychological shift is a large and heavy object that needs a collapse in confidence to move from its current state of inertia. Me: Is it really so large and heavy to move? Or is it, as I wrote in this post, something that "can stop on a dime and reverse course 180 degrees overnight, from greed to fear, based on a single news item"?

3. "Wake me when the managers of trillions of OECD pension assets panic out of their own currencies, and their own sovereign bonds." Me: They may well panic out at some point, but again, will that be a cause or an effect? I will show that it is 100% effect and that, if that's what you're waiting for until you're willing to entertain the risk of hyperinflation, you will be a day late and a dollar short to make any preparations that were contingent upon entertaining the risk.

There's one other item that I want to mention because it also contributed to my decision to write this post. And that is this "no hyperinflation" wager offered up by someone in the MMT camp:

The United States will not experience hyperinflation (defined by 3 consecutive months of 6% Month over Month inflation according to the Billion Prices Project measurement of MoM inflation) from April 17th 2012 to April 17th 2017.

Many people claim the United States will experience hyperinflation, because of a massive increase in the monetary base. The monetary base has shown a huge increase as you can see at FRED under BASE, http://research.stlouisfed.org/fred2/series/BASE

The bulk of the increase in the monetary base happened in late 2008. This prediction gives nearly 9 years for hyperinflation to occur in the United States - many times any reasonable "long and variable delays" between monetary base increases and inflation could logically be linked.

Other people point to so called Quantitative Easing as a trigger for hyperinflation. The first rounds of QE happened in early 2009. This prediction gives 8 full years for the hyperinflationary impacts of QE to manifest in the United States.

Modern Monetary Realism (www.monetaryrealism.com) and Modern Monetary Theory (www.moslereconomics.com) both say there will be no hyperinflation due to the increase in the monetary base. MMR and MMT claim inflation is not likely at all. High inflation might be caused by either vastly higher energy commodity prices due to supply constraints or increases in the notional value the government pays for goods and services. The large increase in the cost of oil has not caused runaway inflation as of April 25, 2012, simply because it was not large and sustained enough. There has been no large increases in the values paid by the U.S. government through April 2012.

Since neither of these two circumstances has happened or are likely to happen in the U.S. during the next 5 years, there will be no hyperinflation in the U.S. as defined by the above prediction for the next 5 years.

Aside from the fact that it would be silly to take the hyperinflation side of a dollar-denominated bet, as I wrote in the comments, I am also not interested in taking this bet because it is a timing bet and I think that sends the wrong message. But I did want to mention it because it makes some specific points which are relevant to this post.

1. That "high inflation" might be caused by supply constraints (similar to the effect of resource scarcity which Gregor mentioned) or increases in the notional value (I think he meant price) the government pays for goods and services.

2. That because there have been no large price increases from 2008 through 4/25/2012, they are unlikely during the next five years.

I will show you that he is looking at the wrong things in saying that if base money creation in 2008 didn't cause price inflation yet, then it won't for the next five years. There are some important differences between today and 2008. For example, the federal budget deficit in 2008 was "only" $438B while the trade deficit was much larger at $698B. And in 2007 the federal budget deficit was even smaller, at 23% of the trade deficit. The 2007 budget deficit was only $162B while the trade deficit was $696B. Today that situation is reversed. So prior to 2009, the foreign sector was supporting the sum total of both the US private and government sector deficits, leaving some room for the private sector and foreign support to contract while the government sector expands. And that is exactly what happened.

Today the federal budget deficit is more than twice the trade deficit, and the foreign sector is supporting less than half while Fed printing supports the rest. Additionally, there are signs today that foreign support is waning even more. I will get to those later, but this is the very recipe for hyperinflation which FOA described, only an order of magnitude worse than in 2001 when he was writing. So anyone who wants to take that silly bet will only lose because the dollars they'll win will be virtually worthless.

A/FOA's Call

In his final month of full posts, from 10/3/01 through 11/3/01, FOA countered both the deflationists and the inflationists (who he grouped as the "hard money thinkers") in his drive to explain how the dollar reserve system will end in hyperinflation. Here's a quick sampling from that last month to show you what I mean:

FOA 10/3/01 - For decades hard money thinkers have been looking for "price inflation" to show up at a level that accurately reflects the dollar's "printing inflation". But it never happened! …

That "price inflation" never showed up because the world had to support its only money system until something could replace it. We as Americans came to think that our dollar, and its illusion of value, represented our special abilities… Oh boy,,,,,, do we have some hard financial learning to do.

FOA 10/25/01 - Somewhere in the 1970s era I was exposed to the thinking of several different deflationists. It seemed that all of their conclusions came to the same end: that dollar deflation would rule the day, no matter what... Deflation was always the final outcome.

FOA 10/3/01 - The relatively small goods "price inflation" so many gold bugs looked for will be far surpassed and the "hyper price inflation" I have been saying is coming is now being "structurally" set free to run.

FOA 10/9/01 - Dollar hyperinflation and super high gold prices are closer than many think.

FOA 11/2/01 - The evolution of Political will is now driving the dollar into an end time hyper inflation from where we will not return. That is our call. Bet your wealth on the other theorist's call if you want more of their last 30 years of hard money success.

Get the point? Good. Now one other thing is that, as I am explaining what I learned from FOA, FOA was explaining what he had learned from Another:

FOA 10/3/01 - A number of years ago, I began to learn from some smart people about the real political game at hand and how that would, one day, produce the final play in our dollar's timeline. Indeed, you are hiking that trail with us today; us meaning Euro / gold / and oil people. All of us Physical Gold Advocates that have an understanding about gold few Americans have ever been exposed to.

Now that you know the A/FOA position (hyperinflation camp, not inflation, not deflation), the A/FOA call ("hyper inflation from where we will not return. That is our call."), and the pedigree of the A/FOA message ("us meaning Euro / gold / and oil people… few Americans have ever been exposed to"), let's get on with the details.

Structural Support

FOA 10/3/01 - Our recent American economic expansion has, all along, actually been the result of a worldly political "will" that supported dollar use and dollar credit expansion so as to buy time for Another currency block to be formed. Without that international support, this decades-long dollar derivative expansion could not have taken place. Further, nor would our long term dollar currency expansion produce the incredible illusion of paper wealth that built up within our recent internal American landscape.

The relatively small goods "price inflation" so many gold bugs looked for will be far surpassed and the "hyper price inflation" I have been saying is coming is now being "structurally" set free to run.

Why "structurally", why now?

For years now, "politically", the dollar system has had no support! Once again, for effect,
"Politically NO", "Structurally Yes"!

For another currency block to be built, over years, the current world economy had to be kept functioning. To this end the dollar reserve system had to be structurally maintained… Truly, the recent years of dollar value was just an illusion. An illusion of currency function and value, maintaining the purpose of holding the world financial and economic system together for a definite timeline. Politically, the world does not hate America; rather they hate the free lifestyle our dollar's illusion value brought us yesterday and today.

If our dollar is going to fall so fast and so far in value that it will be called "hyperinflation", then the dollar must be tremendously overvalued today, right? In fact, and these are FOA's words, "Dollars have no value at all except for our associating remembered trading value with them." A barrel of crude oil isn't worth $100 because a one hundred dollar bill has a value equal to a barrel of oil; rather we remember that a barrel of oil will trade for the same amount of natural gas that also relates to those same 100 units. Money is an associated value in our heads. It's not a physical item.

Yet for the last 30+ years, the fully fiat dollar, a purely symbolic token currency, has been behaving as if it actually is an item of value equal to the real goods and services the US has received through its perpetual trade deficit. Understanding how this was even possible is the only way to understand how it will end.

FOA 10/25/01 - I mean that our whole dollar landscape has now become just a trading asset arena: it's now evolving away from any meaningful currency use to trade for real goods. It can head in no other direction because our local economic structure, the USA economic base, cannot possibly service even a tiny fraction of the buying power currently held in dollars worldwide.

FOA 10/5/01 - The game is to let the US economy suffer from its own bloated expansion by moving slowly away from supporting foreign dollar settlement with CB storage. This is more than enough to end the dollars timeline as we are already stretched to the leverage limit. They know that Greenspan has but one policy to use and that will be super printing. He is doing it now, right on que!

And here we find the key to the kingdom: "supporting foreign dollar settlement with CB storage."

All currencies have the value of whatever they can buy. In a sense, they get their value from price tags offering prices denominated in their unit. But this MoE (medium of exchange) usage demand is not enough for the dollar. It is not enough that foreign goods are priced in dollars. The dollar requires another kind of usage demand: SoV (store of value) usage.

The reason for this is simple. The US is the only originator of new dollars and the US has run an unending trade deficit for 37 years, so the US has been exporting an unending stream of dollars for 37 years. To some extent, that pool of external dollars can circulate outside of the US as long as some foreign goods, like oil, carry a dollar price tag. But that is not enough.

Without foreign CBs supporting this system of foreign dollar settlement by mopping up the unending glut of dollar emissions, the market price mechanism would collapse the US trade deficit in a heartbeat.

Now I've got to make an important point about stock and flow here. We need not be concerned about the stock of dollars held by these foreign CBs, which today stands at more than $5T. The real danger is the unstoppable flow of dollars. No one needs to dump their dollar holdings to collapse the dollar. In fact, they won't dump and I don't expect them to dump, at least not until collapse is well underway.

All they need to do is to slow down mopping up the gushing, unending flow. Here's how fragile the dollar actually is. It is supremely overvalued because its SoV arena, its "trading asset arena" as FOA termed it, simply dwarfs the MoE arena where all currencies get their value. But what threatens the dollar's massive overvaluation most clearly and presently today is only that tiny, marginal portion of the flow: the deficit portion or the unstoppable net-emission of dollars.

Trillions of dollars circulate (change hands) every day, and orders of magnitude more sit idle in investments. But the real threat to all of it is the net-emission of dollars which must be mopped up (stored) by someone. This is the structural support that holds the whole system together: foreign CBs perpetually gorging themselves on Treasuries. It's not that they might sell their stock of Treasuries. The real threat is that they might slow or stop their rate of accumulation relative to our rate of emission.

Big Danger in a Little Marginal Flow

What do I mean by "marginal flow"? Well, first there's something you need to understand about flow. Stock and flow are not directly comparable because while stock is a measure of units, flow is a measure of units per time. We can look at the ratio of stock to flow over a period of time, but I'm not even interested in that in the case of the dollar. With dollar flows, we have the prices of goods and services which are far more relevant to the marginal (deficit) flow of dollars than any measure of the total stock of dollars.

I'm also not really interested in the flow of dollars within the monetary plane of "investments". Investments within the monetary plane change price regularly, sometimes with great volatility, yet without crashing the entire global monetary and financial system. But that real stuff in the physical plane, stuff like food, energy, medicine and industrial inputs, is (remarkably) relatively stable on its dollar price tags over time (at least compared to currencies going through hyperinflation). So we don't need to picture the dollar flow as a portion of the entire dollar stock, we can instead picture it as a flow of real goods and services as long as we focus on the goods and services portion of the BOP. And we also know that government spending (the federal budget) is all on goods and services in the physical plane, not on "investments" in the monetary plane.

So what do I mean by "marginal flow"? The US is the dollar's home, its creator and its legal tender zone. Most everything here carries a dollar price tag. But the US also trades with the world outside of its own currency zone, and in so doing it emits dollars. Last year the US spent $2.66T abroad, but we also took back most of those dollars by selling our stuff abroad. In fact, we took back $2.1T of the $2.66 we sent out. So netting it out, we net-emitted $560B last year. That's 560B dollars created here in the dollar creation zone and sent out into the non-dollar (homeless dollar) zone. That's marginal (deficit) flow. But there's more.

Before I get to the "more", let's reduce this to an easier time-frame. In a stable currency (like the dollar), the prices of necessities like food, energy, medicine and industrial inputs don't change much over a one-year time period. But prices can change overnight, and that's what I'm predicting. So I'm going to start quoting these annual statistics in daily flow amounts, by dividing the annual number by 365. That, of course, includes weekends and holidays. And while our beloved monetary plane closes down for weekends and holidays, the physical plane of necessities runs 24/7.

So looking at it as a daily flow, last year the US in aggregate emitted about $7.3B per day to the world outside of its boundaries and took back in only $5.8B. So the US is a net-emitter of about $1.5B per day. But there's more. In 2009, the federal budget deficit overtook our trade deficit in dramatic fashion. As I said earlier, in 2007 the federal budget deficit was only 23% of the trade deficit. In 2008 it was 63%. And in 2009 it jumped to 367% of the trade deficit. In 2010 the federal budget deficit was 259% of the trade deficit, and in 2011 it was 232%.

You don't see this comparison very often, budget deficit to trade deficit. And the actual percentages don't really matter much. What matters is that it went over 100%. What matters is that, since 2009, the US government (USG) is a net-emitter of more dollars than the US in aggregate emits to the outside world.

So what? Well, the USG emits about $9.8B per day while it takes in revenue of only about $6.2B. So the USG is a net-emitter of $3.6B per day. That's the marginal flow I'm talking about. And there's big danger in that daily flow of $3.6B.

In 2008, the US in aggregate (private sector and public sector combined) net-emitted $1.9B per day to the outside world. This is like a broken water main that cannot be shut off, and must be mopped up by someone. But that year the USG only gushed $1.2B per day. So the foreign mess we created was only 63% attributable to the USG. The other 37% came from private sector deficit spending. But ever since 2008, that broken water main gushing dollars abroad is 100% attributable to the USG alone. And not only that, but it's now spilling out here at home, on our own front lawn!

The USG today is spending $3.6B more than it is taking in, each and every day. That's a big mess of dollars flooding out of the USG. $1.5B per day is flooding outside of our zone while $2.1B is staying right here on our front lawn. This is all flow. It is ongoing and unstoppable. And it all must be mopped up by someone. And by someone, I mean either the foreign sector, the domestic private sector or the Fed buying up US Treasuries. $3.6B per day, an unstoppable, unending broken water main gushing out dollars. Marginal flow!

Don't be fooled by the misdirection. QE, twist, whatever; it's not about interest rates or helping the economy recover. It's 100% about disguising and managing this uncontrollable, unstoppable mess. It's more like a broken sewer line than a water main now that I think about it.

Sure, the Fed needs to keep interest rates from rising. Because what happens when interest rates rise? The value of the entire $35T bond market starts to collapse and bond holders panic. The Fed doesn't want that, so don't bet on them letting interest rates rise. But as I said, I'm not worried about the stock of dollars. I'm worried about this broken sewer line we call the federal budget deficit which means no one has to sell a single bond. In fact, someone has to continuously buy $3.6B more each and every day, including weekends and holidays.

And if prices start to rise as they do in a 'hot' inflation, I propose to you that the USG will not cut back in real terms. So if prices were to rise by, say, 10%, the USG net-emittance of dollars would rise by 10% to $3.96B per day. And because the trade deficit is 100% attributable to the USG ever since 2008, the trade deficit would also rise 10% to $1.65B per day. The USG will not be outbid for goods priced in dollars. Price is what determines who gets a scarce good, and the USG will not be deprived. They even said so in a recent Executive Order! And where are goods and services prices discovered? In the minds of investors with pensions and IRAs, or at the margin where dollars flow?

"Supporting foreign dollar settlement with CB storage"

For decades up until today, foreign dollar settlement has been supported by foreign CBs storing the glut of dollars emitted by the United States, just as FOA said. And by "support", he meant keeping dollar prices stable in the face of a glut of dollars coming out of the US, but to the detriment of the living standard of their own population.

This lack of dollar price inflation to match the monetary expansion of the dollar over the last 30 years has fostered many crazy economic theories to explain how the dollar can't collapse. In fact, most all economic theories today have some explanation or another describing the miracle of the magical dollar. But what they all miss is the political component which supported the dollar for all these years by mopping up that marginal (deficit) flow.

CB storage works, surprisingly, by duplicating the glut of dollars abroad. The CB mops up the dollars and then duplicates them by sending them back to the US public and private sectors (in proportion to each sector's deficit attribution, today 100% USG, 0% private sector) so they can be spent again, and also keeping those same dollars in CB reserves as a debt of the United States. Since 2009, it's all attributable to the USG, so every day, as a billion-plus dollar glut piles up, the foreign CB sends it back to the USG and also stores it in its own vault with a new billion-plus in Treasuries.

But in order to do this, that foreign CB needs to duplicate it again in its own currency. So the foreign CB prints an amount of its own currency needed to buy up the dollar glut, thereby transferring the monetary inflation to its own population and keeping the dollar price tags from changing. No (or low) dollar price inflation. Foreign dollar settlement continues. Support!

Not understanding the political element of foreign CB support is why low dollar price inflation has confounded an entire generation of hard money thinkers. And yet, again today, having finally given in to the miracle of the magical dollar theories, they will be once again confounded as the dollar collapses in hyperinflation upon the removal of that support. But fear not. FOA and I are here to help!

FOA 10/3/01 - For decades, hard money thinkers have been looking for "price inflation" to show up at a level that accurately reflects the dollar's "printing inflation". But it never happened! Yes, we got our little 3, 4, 8 or 9% price inflation rates in nice little predictable cycles. We gasped in horror at these numbers, but these rates never came close to reflecting the total dollar expansion if, at that moment, it could actually be represented in total worldwide dollar debt. That creation of trillions and trillions of dollar equivalents should have, long ago, been reflected in a dollar goods "price inflation" that reached hyper status. But it didn't.

That "price inflation" never showed up because the world had to support its only money system until something could replace it. We, as Americans, came to think that our dollar and its illusion of value represented our special abilities; perhaps more pointedly our military and economic power. We conceived that this wonderful buying power, free of substantial goods price inflation, was our god given right; and the rest of the world could have this life, too, if they could only be as good as us! Oh boy,,,,,, do we have some hard financial learning to do.

Over the years, all this dollar creation has stored up a massive "price inflation effect" that would be set free one day. Hard money thinkers proceeded to expect this flood to arrive every few years or so; the decades passed as those expectations always failed. Gold naturally fell into this same cycle of failed expectations, as the dollar never came into its "price inflationary" demise.

A number of years ago, I began to learn from some smart people about the real political game at hand and how that would, one day, produce the final play in our dollar's timeline. Indeed, you are hiking that trail with us today; us meaning Euro / gold / and oil people. All of us Physical Gold Advocates that have an understanding about gold few Americans have ever been exposed to.

Our recent American economic expansion has, all along, actually been the result of a worldly political "will" that supported dollar use and dollar credit expansion so as to buy time for Another currency block to be formed. Without that international support, this decades-long dollar derivative expansion could not have taken place. Further, nor would our long term dollar currency expansion produce the incredible illusion of paper wealth that built up within our recent internal American landscape.

The relatively small goods "price inflation" so many gold bugs looked for will be far surpassed and the "hyper price inflation" I have been saying is coming is now being "structurally" set free to run.

Why "structurally", why now?

For years now, "politically", the dollar system has had no support! Once again, for effect,
"Politically NO", "Structurally Yes"!

For another currency block to be built over years, the current world economy had to be kept functioning. To this end the dollar reserve system had to be structurally maintained; with its IMF agenda intact, gold polices followed and foreign central bank support all being part of that structure. Truly, the recent years of dollar value was just an illusion. An illusion of currency function and value, maintaining the purpose of holding the world financial and economic system together for a definite timeline. Politically, the world does not hate America; rather they hate the free lifestyle our dollar's illusion value brought us yesterday and today.

Now that the Euro block is passing a point where the Euro currency is viable; this same past dollar support that built America's illusion wealth will now fall away. In its place we will see the beginnings of a currency war like no other in our time.

This very change in structural dollar support is the same change that has been impacting our fed's actions for over a year now. This change is the difference between my call for super price inflation and the endless calls past hard money thinkers have made. Their on again / off again goods "price inflation" outlook is based on the same failed analysis that expects price rises because the fed was into another "printing money faster" cycle. I point out that that cycle has come and gone many times without a price inflation anything close to our total, long term, dollar creation.

Further

To this end, I have been calling for a hyper inflation that is being set free to run as a completed Euro system alters Political perceptions and support. That price inflation will be unending and all encompassing. While others call, once again, for a little bit of 5, 10, 15% price inflation, that lasts until the fed can once again get it under control,,,,,,,,, I call for a complete, currency killing, inflation process that runs until the dollar resembles some South American Peso!

[…]

Greenspan will not embark on a dollar building policy again! Even if he changes his mind about leaving. Unlike our past inflation cycles, he has only one act to follow because he must support the internal economic dynamics of this country as its dollar falls from reserve status. There will be no inflation "cycle" on this go around. The creation of a competing Euro currency block has changed his policy dynamic.

The fed has cut rates below perceived price inflation levels already and will cut again and again; even in the face of real, published, soaring, official statistical CPI. The die has been cast and the game is in process.

That was written in October, 2001. So what happened? It's simple really. From my post, Moneyness, the black dividing line is right around October, 2001:

People like to say that A/FOA got it wrong, because the timing didn't seem to play out exactly as they inferred it would. But I would like to proffer another view. Perhaps FOA was unaware of the lengths to which the PBOC was prepared to go in supporting the dollar and the US trade deficit over the next decade.

China was admitted into the World Trade Organization on December 11, 2001, one month after these posts. And it wasn't until 2002, after FOA stopped posting, that China really began to ramp up its trade with the US and to purchase US bonds in size [mop up the deficit flow of dollars keeping dollar prices low and stable]. From '99 to '01 China's Treasury holdings were flat at around $50B, but from 2002 they began a parabolic rise that has now ended and is once again flat.

So if China has backed off from supporting the dollar today, in the same way that the European CBs had backed off right when FOA wrote these posts, well then perhaps they are more relevant today than the day they were written.

Here is Ben Bernanke from a speech in 2005 noticing the shift in dollar support from "industrial countries" (Europe) to "developing countries" (China) which took place sometime "between 1996 and 2004":

The collective current account of the industrial countries declined more than $441 billion between 1996 and 2004, implying that, of the $548 billion increase in the U.S. current account deficit, only about $106 billion was offset by increased surpluses in other industrial countries. As table 1 shows, the bulk of the increase in the U.S. current account deficit was balanced by changes in the current account positions of developing countries, which moved from a collective deficit of $90 billion to a surplus of $326 billion--a net change of $416 billion-- between 1996 and 2004.

Of course in 2005 the federal budget deficit was only $317B while the trade deficit was $708B. So the foreign sector was still supporting the sum total of the US public and private deficits by mopping up the entire glut of dollar net-emissions to the tune of $708B per year, or $1.94B per day. And this would be a good time for me to put down a common myth propagated by Ben Bernanke as well as, well, everyone else.

It is a myth that QE is a result of the Fed's concern for the economic outlook or even about keeping interest rates down. That's just what they want you to be focused on, rather than the real reason for QE. Notice that QE began at the same time as the federal budget deficit overtook and surpassed the trade deficit. Not only that, but the amount of QE matches close enough for government work the difference between the budget deficit and the trade deficit.

It is also a myth that QE is sterile money creation because (as they like to say) it is all just sitting on the banks' balance sheets as excess reserves held at the Fed rather than circulating in the economy. In fact, it is ALL circulating in the economy because the USG spends that money into the economy. Government dollar emissions simply come with bank reserves. If you don't understand this, please go back and review my banking system model in Peak Exorbitant Privilege.

So if you're watching "economic indicators" and Treasury market figures and interest rate curves trying to guess if there will be more printing, aka QE3, you should instead ask yourself if the USG will cut a quarter of all its spending habits this year, or ever. That would be roughly equivalent to cutting all of Medicare, or all of Social Security, or all of defense spending, or a third of each, just to give you an idea of how much they are printing.

What we have today, in essence – nay, in reality – is the USG running a daily deficit of $2.1B against its own economy and another $1.5B per day against the rest of the world. FOA explained that what this means in essence – in reality (when you are the printer of the global reserve currency) – is the fleecing of the standard of living of someone else:

FOA 2/26/00 - So, dollar hyper inflation never arrived and gold did not make its run because world CBs bet your productive efforts on supporting the dollar reserve. In the process, the US standard of living was raised tremendously on the backs of most of the worlds working poor. But this is not about to last!

FOA 3/10/00 - My point was that their actions can only be justified from a position of "buying time"… Their Central Banks support polices were a decision to waste their citizen's productive efforts in a process that held together a failing currency system.

FOA 4/19/01 - What changes is the recognition of what we do produce for ourselves and what we require from others to maintain our current standard of living… We will come to know just how "above" our capabilities we have been living. Receiving free support by way of an overvalued dollar that we spent without the pain of work.

FOA 7/16/01 - The American dollar has bought its makers a lifestyle that is at odds with this new thrust in money use. A reserve currency today must allow its value to be set solely upon its money function [MoE arena], not its function of retaining wealth [SoV arena]. Use trends today are forcing money creation policy and money values to be determined by wealth outside the official money realm. All the while the dollar holders are fighting to stop this from happening.

FOA 7/20/01 - For years American lifestyles encouraged its political system to protect their banking /debt credibility at all costs; so we could buy others' real goods without sending real wealth to pay for it. We did this in the only way we knew how; in body, mind and spirit, our political economic purpose promoted the dollar and its debt to be as good as gold and a substitute for real wealth holdings. Even a substitute for real wealth to be held in reserve behind other currencies!

FOA 10/5/01 - Even the third world didn't want to hear it. They figured that any return to a hard money system would hark back to a time they remembered well. These guys suffered during the early century and no one was going to tell them that the gold standard wasn't at fault. The US is today, and was then, robbing them blind but the situation seemed, to them, that this new dollar standard was building them up. Looking at it all,,,,, we robbed the Japan life style standards the most. All to buy us an almost free standard and they loved it.

FOA 10/8/01 - We managed this threat with help from our Euro friends; somehow thinking they enjoyed and wanted our fleecing their lifestyle to the same degree we did it to the rest of the world. Their cooperation, we will find out, was but a structural policy that bought time; time for a dollar replacement to be made.

FOA 10/26/01 - Again; this all works as long as the world "buys into" using our dollars. As I said; an expanding fiat works to grow the economy thru expanding credit buying power because the fed can support the system with credit creation that has no "inflation premium". That lack of premium only exists as long as Americans can exchange free credit for real physical goods. Once this perception changes it's over. Once the world understands that it's not local US goods that stands behind dollar growth, but less expensive foreign goods,,,,,,,,,, the stage is set for our "supporters" to sell to themselves! Making themselves
"lifestyle rich". All they need is Another currency unit.

Here's the bottom line, and the absolute correct way to view the USG's deficit spending today. Starting in 2009, the US private sector was no longer "fleecing lifestyle" from the rest of the world through the exorbitant privilege of its currency (a privilege which began in 1922 and peaked in 2005). Beginning in 2009 the USG started fleecing lifestyle from its own economy (in addition to the rest of the world) while ironically calling it "economic stimulus". This is the meaning behind these shocking images from 2009, which I first used in my 2009 post, No Free Lunch:

Global resources are being fleeced by the USG at the rate of $1.5B per day, while American resources, above and beyond the normal "internal revenue service," are being fleeced at the rate of $2.1B per day. The foreign resource fleecing is being enabled by foreign CBs (mostly China up until recently) buying Treasuries, and the local resource fleecing is enabled mostly by QE, but also partly by your pension fund manager buying you some of those tasty yield-free Treasuries.

It is no wonder at all that the stock market is doing relatively well given the unstoppable domestic sewage – I mean dollar – leak that is the USG's deficit spending. Unfortunately (for everyone) the stock market doesn't sterilize the sewage against goods and services price inflation the way the Treasury market does. The dollars just flow right through the stock market to the sellers.

But as I wrote above, it doesn't really matter what percentage of the trade deficit the budget deficit is, just that it's over 100%. As long as it's over 100%, the entire trade deficit is 100% nominally attributable to the USG, which means if we get some "hot inflation" either the USG will have to give up some of its consumption in real terms, or else defend its "lifestyle" with the printing press, right there at the margin where prices are discovered.

I don't expect this inflation to originate inside the US. In fact, as long as foreign CBs are structurally supporting the dollar reserve system by mopping up our $1.5B per day outflow, the American people are getting a pretty good deal on their own fleecing. I mean, even though we are being fleeced of $2.1B per day in "lifestyle" by our own government (in addition to taxes), for that fleecing we are actually receiving $3.6B per day back in government. ROI! So even though government is terribly wasteful, our wasteful government is still being subsidized by y'all! "Life is so fucking good I can taste it in my spit."

And because the US private sector deficit spending in aggregate has contracted to well below zero since 2008, I have a hunch that a lot of the fat has been cut out of the "basket" of US imports. The trade deficit has dropped from $698B in both 2007 and 2008 to $500B in 2010 and $560B in 2011. I bet all of that ~$130B drop has come from private sector consumption reduction (private sector crashing its living standard). In fact, the "private sector consumption drop" is probably greater than ~$130B and the USG has made up some of it by expanding its consumption. But the USG doesn’t consume cheap consumables from Walmart. The USG consumes important stuff… stuff we generally call necessities.

Looking at the top imports from 2008 as well as the fastest growing imports of significance (say, over $5B per year at least), the top "necessities" are oil, medicinal preparations, petroleum products, coal, fertilizers and pesticides, food oils, oil field equipment, feedstuff and foodgrains, unmanufactured steelmaking materials, industrial organic chemicals, and semifinished iron and steel.

Again, this is just a hunch, but that's probably a good list of things to watch for price increases that could quickly turn hyper when the USG refuses to be outbid… if and when the foreign CB "structural support" slows down and the rest of the world stops exporting necessities to the USG for nothing but paper that will soon be worthless. So now that we know what to watch for, let's take a look at the state of that "structural support" today.

The US Treasury puts out a list of Foreign Holders of Treasury Securities. The latest update, which was put out on April 30th, covers Treasury holdings through February 2012 and shows each month for a whole year, in this case beginning in February 2011. The top row is China because China has the most Treasuries. And looking across for the year we can see that China's holdings are pretty flat, except that they peaked at $1.3T in July and then dropped all the way to $1.178T in February.

It looks like Japan (line 2) really picked up the slack though, buying $205B in Treasuries from February to February. I guess we better hope that Japan keeps running a trade surplus! Oops…

2/29/12 - Best advice: keep a track of that Chinese trade surplus. If it becomes a deficit (just like Japan did recently), that is the first signal that things are changing dramatically from an international flow of funds perspective. It also means that unless the US finds subtitute demand, most likely from within, the only remaining buyer will be the entity that already has the largest holding of US paper - the Federal Reserve.

That last year of Treasury data, from Feb. to Feb., shows that the increase in foreign Treasury holdings covered the trade deficit for that year. If we look down at the last line, grand totals, and subtract Feb. 2011's total from Feb. 2012's we come up with an increase in "structural support" of $633.3B. And if we add up the monthly trade deficit for those same months we come up with $565.5B. Once again, close enough for government work. So I guess it's a good thing someone's still propping up the dollar. But wait! Here's another one from Zero Hedge only ten days later:

3/10/12 - In addition to all the US election year propaganda and delayed after effects of central banks injecting nearly $3 trillion in liquidity to juice up the US stock market, something far more notable yet underreported has happened in 2012: the world stopped exporting. Observe the following sequence of very recent headlines: "Japan trade deficit hits record", "Australia Records First Trade Deficit in 11 Months on 8% Plunge in Exports", "Brazil Posts First Monthly Trade Deficit in 12 Months " then of course this: "[US] Trade deficit hits 3-year record imbalance", and finally, as of late last night, we get the following stunning headline: "China Has Biggest Trade Shortfall Since 1989 on Europe Turmoil."

You can nitpick that data all you want, but one thing is as clear as an azure sky of deepest summer. This is a very different picture from the China of 2002 embarking on a "parabolic rise" in US dollar "structural support". In fact, even though it is true that some combination of Japan, oil exporters, Caribbean banking center, Taiwan, Switzerland, Russia, Luxembourg, Belgium and Ireland (to name a few) managed to cobble together the necessary support last year, the dollar is now living off of a willy-nilly support system rather than the "structural support" it enjoyed for the last 30 or so years. If FOA was here, he'd probably say something like this:

The relatively small goods "price inflation" so many gold bugs looked for will be far surpassed and the "hyper price inflation" I have been saying is coming is now being "structurally" set free to run.

Of course "hot inflation" is coming! But how long will it last? How long can it last without the structural support of foreign CBs mopping up the dollars the USG will be printing in order to defend its own "lifestyle" in real terms? How far can prices rise without hitting that hyper feedback loop at the margin where prices are discovered? The USG is net-emitting $3.6B per day today, and the problem is that the USG is not an economy. It is a consumer and a printer. So the daily net-emission of global dollars is now backed, not by an economy, but by the largest consuming entity ever known to man!

Lee and Paul are correct that the commercial banking system will soon be fully reserved. But I don't think those new reserves will come directly from the Fed in exchange for bank assets. Now that the government deficit has surpassed the trade deficit, all foreign support is Treasury buying, not private sector debt like MBS. The crossing of this Rubicon means that maintaining the Treasury market takes structural precedence over all other assets. It also means that every new dollar the USG decides to spend puts new reserves into the private sector banking system, raising its ratio of reserves to deposits. So the new reserves coming into the banks will be coming from domestic USG deficit spending via QE or whatever they decide to call it next time. And I believe that those bank assets and "unreserved credit" will simply die on the vine of worthless tokens as the USG crushes its own currency defending its lifestyle.

Gregor is correct about the "benign" inflation we've had, not just for the past decade, but for the past three or four. This is what FOA was talking about. "Yes, we got our little 3, 4, 8 or 9% price inflation rates in nice little predictable cycles." But hyperinflation "never showed up because the world had to support its only money system until something could replace it." The euro was born, then came China, and my call is that hyperinflation "is now being 'structurally' set free to run."

If you print enough money, you can get the price of everything to rise. Just look at Zimbabwe if you don't believe me. But printing doesn't make all prices rise in unison. Gregor makes a good case for the "Middle Class Squeeze" combined with asset price deflation, an inflation/deflation double whammy, as well as resource scarcity-driven subsistence inflation leaving no discretionary spending room for the poor or those in developing countries. And from the "Executive Summary" of his part 2: "Rising wages in the developing world create upward price pressure everywhere globally." I agree with Gregor on all counts!

So yes, I agree with Gregor that "hot inflation" is coming and it's a real risk. But inflation generally suppresses consumption in real terms. As Gregor says, "it quickly begins to drive out spending for discretionary goods in favor of true basics." But this doesn't apply to the USG who can "spend" infinitely in extremis. Gregor concludes his part 1 with this:

The United States currently enjoys reserve currency status, which enables it to borrow cheaply, and which keeps capital circulating through our government bond markets, which are the largest in the world. Given the backdrop to our post-credit-bubble environment, it is now the consensus view that we will cut a path similar to Japan’s as we oscillate from weak growth back to the stimulative rescue policies of the Federal Reserve.

There is therefore a sense of complacency about an escalation in prices.

That highlighted portion is the premise on which virtually everyone in America is operating, without even understanding what it really means. It is the miracle of the magical dollar theories laid as the solid foundation under any and every discussion. One of my readers, Michael, a medical doctor, was attending a conservative "Tea Party-ish" meeting in California yesterday. The meeting included US Senators and Representatives, and they were totally operating on the premise of the miracle of the magical dollar theories. You can read his interesting report here.

The point is that the premise rests on 90 years of history which only makes sense if viewed properly. It rests on 50 to 60 years of political support followed by 20 years of structural support from Europe and another 8 or 9 years of structural support from China. Today both political and structural support are gone, and the "solid foundation under any and every discussion" of monetary matters in America is what I am generously terming the "willy-nilly support" of the rest of the world. In other words, we have no say in the matter. Our fate is in their hands. Which kind of renders the premise invalid, doesn't it?

I agree with Gregor that "hot inflation" is coming whether you like it or not, for all the reasons he explains and more. My only disagreement is that Congress will take it more hyper than we've seen in all of fiat history, so fast it will peel the skin off your face, because they are operating on a false premise. The miracle of the magical dollar theory premise is a false premise because it completely misses what's going on. And anyone who's waiting for those operating under a false premise to panic out of their dollar holdings before even entertaining this reality is like someone waiting for the loss of consciousness before entertaining the possibility of death.

The dollar is so vastly overvalued today because the rest of the world has kept it on life support for 30 years past its expiration date. It is the stability of dollar prices at that small marginal flow that sustains the illusion of wealth in the entire, massive monetary plane. And yet the modern "hard money thinkers" think that we can somehow retain this level in real terms by simply devaluing the dollar against gold and then managing that new "gold value". I wish all the modern hard money thinkers – you know who they are so I don't need to mention any names – would just take a few minutes and listen to FOA and maybe, just maybe, see how wrong they are. It's all in that last page of The Gold Trail, but I tried to make it bite-sized in a recent blast of Tweets. #HMS means Hard Money Socialist which describes all of these guys. If you don't understand, go see for yourself. These are all FOA quotes from that last page (edited for Twitter):

"Truly, to this day, #HMS think their ideas are the saving grace of the money world. It isn't now and never was then." #FOA

"This political process of fixing money to gold has ruined more economies, governments and societies than anything." #FOA

"It just flies right past them that the ECB wants gold as a dollar replacing *asset*, not local money backing." #FOA

"#HMS call for "official money gold" as the only way governments can go. That will not ever be allowed again." #FOA

"These are the same people that hold free markets on a high plateau as the goal for everyone. Yet, they talk a story of gold control." #FOA

"Fortunately for the majority of world physical gold owners, the hard money socialist game has ended." #FOA

"Late comers to this understanding will encounter a true free market, but their buy in price will be at a much higher natural level." #FOA

"In the late 60s, #HMS seemed so natural. However, even then, I had some serious people pointing me in a different direction." #FOA

"This is all happening while Western style Hard Money Socialists are defending their stance by saying Euro is just another fiat. Ha!" #FOA

"Western thought is gold=money. This simple picture from the middle ages banking renaissance is used to bastardize the gold story to this day." #FOA

Please go read that last page of The Gold Trail after reading this post. Start at the bottom and read up. It's in reverse order, unlike the first five parts. There's so much more there than the little bits I included here. It's the very last words he wrote before he stopped writing. I know that some people think I approach these A/FOA archives somewhat religiously. Well, I do!! Look at the subtitle at the top of this blog! Not in any way similar to spiritual faith, but My God, has anyone – and I do mean ANYONE – explained what's going on today better than these guys?

Sincerely,
FOFOA

PS. If you appreciate this blog and my efforts here over the past 3 ½ years, 360 posts and more than 32,000 comments, please consider making a donation to support my continuation of this project. These donations are my only source of income.

I have been wondering...does the Euro need even a single nation to use it as a MoE within its borders? Could every single nation return to its old currency for internal use and yet allow the Euro to survive only as a MoE with the outside world? I haven't thought this through but if the architecture is seen as good by 'oil' and others could it not function as 'gold'? That is to say the Euro would be used for international trade and perhaps for selling bonds (by the Greeks when the drachma simply won't work) and other financial instruments.What if the EU went to a two currency system, one for locals and the local government, the other, the Euro, for international travel and international settlement? Could that work? The Euro has achieved its beginning and has a foothold in the world, what is to say it must be everyone's national currency too? It is there, ready to serve as a reserve currency. It could prove its commitment to price stability in the months to come. If it is successful in doing that so what if various nations find it unsuitable for internal MoE functions?

Carl said: it's people who've lost all faith in the currency and are trying to get out of that currency and into tangibles as fast as they can.

Good Carl, getting closer.

Here's FOFOA: What are you more afraid of, running out of dollars or dollars becoming worthless? This is the problem with fear; it can turn on a dime without ANY notice.

Here's some more FOFOA:

I tend to agree with 99% of what the deflationists write. For the most part they are masters at analyzing the minutiae and then painting it into a grand macro picture. I like the Kondratieff cycles and I agree we are in the winter cycle. In fact, almost everything most deflationists describe will probably happen, in my view.

But they all miss the hyperinflation that is coming. And they miss it because they don't understand how perfectly it fits with a deflationary collapse. In fact, they argue vehemently against it the same as they argue against inflation, which is how I know they don't understand hyperinflation. And they miss it because they are so meticulous in their observations and calculations that they can't see that the collective will always changes the rules when things get really painful. The political will (which is the same as the collective will in my lexicon) always does whatever will lessen the immediate pain, even if it will most certainly cause greater pain later. This is the part that is as reliable as the sun rising.

The Amero would either be a New Dollar, or a supra-currency like the SDR. If a fiat New Dollar, run by the US, it wouldn't get traction post-freegold.

If they tried some kind of gold 'backing' it would be more like an SDR. This quote also address Borjesson's question about why anyone would use the euro.

FOFOA: The point is, there's a turn-key problem-solving system waiting in the wings. So whenever you hear anyone in the hard money camp or the Anglo-American press talking about something that sounds like the SDR with "gold backing" (watch out for that word "backing") don't buy it for a second...

The point is, once "Freegold" (nature's wrath) inflicts itself upon us all, it won't really matter what is chosen/used as the super-sovereign or supra-national currency to lubricate international trade. It could be the euro, the yuan, the SDR, Facebook Credits or even the dollar! Triffin's dilemma will be gone. And you shouldn't worry so much over the transactional currency question, because that will be chosen through the market forces of regression, the network effect and game theory's focal point discovery at the international level.

The member countries have deposited some reserve when they entered the Euro. 15% of which was gold.

The question is what happens to the reserve contributed by a country if it exits the Euro. Will the deposited reserve be forfeit or will it be returned. I think much of it still resides with the member CBs so I guess it cannot be forfeit.

If it would be forfeit, then even if all countries exit, still ECB would have 10,000Tons of gold. That would make it a very credible currency without any members. Euro could still be used in International transactions.

And if the reserve will be forfeit it would be a bigger suicide to exit the Euro.

I guess the question is relevant in the case of Greece which might try an exit.

First, the question. "Where will the money come from?" is a question of supply. Yet the answer to hyperinflation lies on the demand side of the equation. This is Rick Ackerman's big gap in understanding. Let me explain.

The value of money, like everything else in life, derives from supply and demand. There are two distinct entities that each control one side of the equation, kind of like a tug-of-war. The printer controls supply and the marketplace controls demand. A tug-of-war is actually an apt analogy. When demand for a currency spikes its price, the printer just eases his grip on the rope, releases more rope and the whole demand side just falls on its butt.

We saw this with the yen after the earthquake and with the dollar a little over a year ago. With a fiat currency, this is the way it works. No matter how hard demand pulls, if the printer doesn't want the price of the currency to spike all he has to do is release more rope. It's his ace in the hole. He can always send the marketplace to its butt. The printer is firmly in control of the supply side.

But in the same way that the marketplace has no control over the supply side, the printer is powerless on the demand side. ANOTHER alluded to this years ago when he wrote:

Know this, "the printers of paper do never tell the owner that the money has less value, that judgment is reserved for the person you offer that currency to"!

So it is the receiver of currency—not the giver—that determines its value. That's the power of demand. And what do you think happens to the printer when the demand side drops the rope? If he was pulling he falls on his butt. If he was releasing, he's now pushing on a limp string. And this is part of what confounds deflationists. They can only imagine hyperinflation happening while demand is pulling and the printer is releasing. They imagine "inflation-on-steroids," but that's not how hyper works.

Hyperinflation is initiated when the physical plane stops bidding on the monetary plane with physical goods. Not when the monetary plane bids up the physical plane with lots of paper. The latter is the necessary reaction to the former.

Further, gold is the proxy-par-excellence for the physical plane and thus carries additional gravity in this process.

If it would be forfeit, then even if all countries exit, still ECB would have 10,000Tons of gold. That would make it a very credible currency without any members. Euro could still be used in International transactions.

The ECB has @501 tons of gold.

The Coinfinstat is the Eurosysem's gold, it is the balance sheet of the whole Eurosystem which includes all of the NCBs using the euro.http://fofoa.blogspot.com/2012/01/party-like-its-mtm-time.html

But yeah, you've hit on the key theme. The Euro is severed from the nation state. There need to be states using the euro, but the failure of any one of those states won't mean the euro fails.

FOA (09/16/00; 15:11:26MD - usagold.com msg#38)

Basically, this is the direction the Euro group is taking us. This concept was born with little regard for the economic health of Europe. In the future, any countries money or economy can totally fail and the world currency operation will continue. What is being built is a new currency system, built on a world market price for gold.

Aquilus said: Think about all other currencies that hyper-inflated: the mark in Germany, the ruble in Russia, the peso in Argentina, the Zim dollar in Zimbabwe, etc. At the end of Hyper-Inflation, they just chop zeroes from the end, call it the "new" whatever for a while until the "new" moniker is dropped in a little while.

If someone as tackled the high probability of a credit collapse, sans FRN note, please point out that post so I may read it because I surly missed it.

The whole hyperinflation argument hinges on the physical supply of FRN notes present in the economy because without those notes IN CIRCULATION, all you'll have is a credit collapse hyperdeflation.

That's what a global rejection of the dollar as a medium of exchange means, without the actual physical FRN Note Dollar "in place" to give them something to physically reject and return, all you get are a bunch of meaningless digits spinning around inside the bankster's hard drives and a bunch of elitist asswipes running around trying to figure who owes what to who...

They say "no, thanks" to the offer of dollars, not "thanks for all the dollar credits, but here, have them back because they are not real dollars".

...

Remember this: in hyperinflation the physical plane FEARS the monetary plane because it is crashing. It is not GREED that drives the prices up, "give me more credits for this apple." It is FEAR of the credits, "get those credits away from my apple"... "but wait, sir, here I can double my offer, two wheelbarrows of cash for your apple."

I honestly feel like I'm talking to a pile of rocks here. NO ONE gets it.

Carl says: The whole hyperinflation argument hinges on the physical supply of FRN notes present in the economy because without those notes IN CIRCULATION, all you'll have is a credit collapse hyperdeflation.

I think you are arguing about the definition of hyperinflation. FOFOA says hyperinflation is the loss of confidence in the currency. You say hyperinflation is the rise in prices.

Using FOFOA's definition, the argument here is that you have cause and effect reversed. Hyperinflation comes first (loss in confidence in the currency), so sellers of stuff push up prices as high as they can, outside of the reach of the vast majority of their previous customers. Cash is accepted, but credit cards may not be. So there is high demand for cash, and cash is printed to meet the demand. Prices go higher. Repeat. You are calling this second part (price rises) hyperinflation, not the first part, as FOFOA does. Am I reading you correctly?

LOL... Carl, see my sphincter? Take a good look at 'ol one eye. That stink eye is for you Carl.

"The lesson I hope you'll take from this story is simple. The next time a deflationist tells you there is no possible mechanism for hyperinflation in the dollar, just show him your sphincter and say, "oh yeah?" ;)"

Dr. Octagon said... "I think you are arguing about the definition of hyperinflation. FOFOA says hyperinflation is the loss of confidence in the currency. You say hyperinflation is the rise in prices."

No I'm not saying that at all. What I am saying is that hyperinflation is a physical currency event and that without that physical currency in place, a loss of confidence in the currency, which is digital credit, will only lead to credit collapse/hyperdeflation.

"Notice that there is nothing in this view about the addition of new dollars. There is nothing about printing wheelbarrows full of money. All that stuff is secondary to the initial blast that explosively exits through a very small opening."

Carl says: What I am saying is that hyperinflation is a physical currency event and that without that physical currency in place, a loss of confidence in the currency, which is digital credit, will only lead to credit collapse/hyperdeflation.

So, prices will collapse to match the physical currency available? I can see that argument, but that sounds like "a run on the bank". Isn't one of the reasons for having a central back to protect people from a run on the bank? Isn't the protection the printing of currency?

FOFOA's argument relies upon the notion that Credit Dollars will act/react exactly the same as Physical Dollars.

So, when the "Monetary Plain" which is comprised of assets that are DENOMINATED in dollars, which are currently expressed as Digits Stored On Hard Drives, collapses upon the "Physical Plain", we get hyperinflation without any additional dollars being printed. That would be Hyper-Price-Inflation.

The problem with that argument is: Somebody on the "Monetary Plain" is going to demand to be paid in the "Unit Of Account" and if that happens on a large scale in the "Monetary Plain" all the "Physical Plain" will experience from that conflagration, is the ashes from a once mighty "Monetary Plain" raining down.

Carl is the only one making sense here. In addition to what he said, let me give you additional evidence about why the hyperinflationists are wrong.

From a sentiment point of view, hyperdeflation is more likely than hyperinflation and let me tell you why. US treasury market had been in a bull market for over 30 years, and all the while MSM and other pubdits had been complaining about crash of treasuries. We have seen how long bull markets end in case of stocks in 2000 and houses in 2005. If I were to assume that US treasuries are to finish its bull market here, the sentiment would be very similar. A 30 year long bull market does not end with everyone on the bearish side.

Today US treasuries are taking the place of gold of 1932, whereas credit/electronic currency is taking the place of paper dollar of 1932.

Can Fed+Federal government 'print' US treasuries at will, and more importantly have the willingness to do so? We need to keep in mind that Federal government needs to create 50T of treasuries to compensation collapsing private credit market? For 'hyperinflation' that you guys are looking for, US government needs to create treasuries (=borrow) of the order of 500T or 5000T dollars? Do you really see that happening?

Dr. Octagon said... "So, prices will collapse to match the physical currency available? I can see that argument, but that sounds like "a run on the bank". Isn't one of the reasons for having a central back to protect people from a run on the bank? Isn't the protection the printing of currency?"

Considering our entire economy is predicated upon a functioning credit system, with a credit collapse, I think the ability to acquire the necessities of life will take precedence over price.

The "bank run" will occur over our economic heads, in the "Monetary Plain", all we'll experience from it, is the aftermath.

Carl - Why would there be a collapse in dollar-denominated credit money, but not in physical cash? Isn't a loss of confidence going to affect both? I don't see how a collapse in confidence in currency causes a dramatic permanent *increase* in the value of the physical form of that same currency. I can see a temporary increase, as people sell stocks/bonds for cash on their way to trading cash for hard assets, but I don't see how the cash keeps value once velocity dies down.

There is another important angle to this story that the deflationists all miss. You may have caught it if you thought to yourself, "Well, even if the Fed keeps the savers balloon 100% full while the debtors balloon deflates, that's only half the money supply as before." This is exactly how the deflationists think. They see no difference between the two.

But there is a fundamental difference between the kind of money that fills the debtors balloon (credit money or balance sheet money) and the kind the Fed is using to prop up the savers balloon (monetary base). This is a critical difference that deflationists can't seem to wrap their heads around (and I'm not sure why).

You see credit money is tied to the functioning of the economy and base money is not. As the debtors balloon deflates, so does the functioning economy, and so does the real world of goods that backs the money supply. Base money does not contract along with the economy like credit money does. And base money is the fuel in all hyperinflations while credit money vanishes!http://fofoa.blogspot.com/2010/09/just-another-hyperinflation-post.html

And now that you have a little bit of understanding about the difference between economically-tied credit money and base money (cash or its equivalent), as well as the power of fear and velocity, I want you to notice that the hyperinflations of the past have all played out with base money, not credit money, at the helm.

This is where all those "excess reserves held at the Fed" become very dangerous. You see, those are monetary base reserves, not credit money. They may not be physical cash yet, but they are contractual obligations of the Fed to print actual cash. And if velocity picks up in a panic, that's exactly what the Fed will have to do in order to keep the banking system from collapsing. Deflationists think this is a choice the Fed will have to make, but it is not.

It is already happening to a smaller degree with the Friday bank failures. Ever since the FDIC ran out of "reserves," every failed bank has been propped up with more fresh base money. "Saving the savers' deposits!" Converting them from credit money into base money in whatever amount exceeds the failed bank's marked-to-market assets.

So there is already enough fuel in the system to feed the fire when it starts.

And when it starts, that is when prices start to rise... price hyperinflation. And as prices rise, the government will need more money to pay for the same amount of "governing" in each successive cycle (monthly). This is when the monetary hyperinflation takes over and gives the price hyperinflation its HYPER boost.."

A sentiment argument has nothing to do with Feds, money printing, gold, blah, blah. A long bull market ends, when everyone is bought into it. A long bear market ends, when everyone is disinterested. You have seen that with housing in 2005, stocks in 2000 and gold in 2001. How many people around you talked about buying gold in 2000-2001?

Credit money and base money are different - credit money refers back to the monetary base for value.

Moneyness - http://fofoa.blogspot.com/2011/11/moneyness.html

Well, there you have it! The pure concept of money is our shared use of some thing as a reference point for expressing the relative value of all other things. Money is the referencing of the thing, not the thing itself. As FOA said, money is "a value stored in your head!" Money is not something you save. "Money in its purest form is a mental association of values in trade; a concept in memory not a real item… the value is in your association abilities. This is the money concept, my friends."

But what does this have to do with me in 2011? I can almost hear you thinking this question now. Well, I'm going to share a secret with you. The big secret is that the people's money is simply credit. And by "the people's money," I mean our money, the real producing economy's money. The monetary base is only the banks' and governments' money, except for that little bit of cash you keep in your wallet for emergencies. Let me explain.

Today's monetary base is a clearly defined thing. It is all physical currency plus reserves held at the Fed. We the people cannot have electronic base money. We cannot open an account at the Fed. Only banks and the government can. We use commercial bank credit and private credit to keep the economy churning. The reference point of our credit is the base. We reference that base when we transact in "dollars".

Private and commercial bank credit appears and disappears spontaneously all the time, all throughout the real economy. This is what actually lubricates the economic engine; having a base of stable value to which we refer in monetary transactions. Private credit is generally cleared using bank credit. And bank credit is cleared using the monetary base. But all credit denominated in dollars refers to that base and relies on a stable unit value or price stability.

It is the banks' job (both commercial and central banks) to make sure that bank credit (the people's money) and base money (the banks' money) are fungible. That is, they are always freely and equally exchangeable. But of course they are two separate things, credit and base money, with two very different volumes. Under normal conditions, there's a lot more credit money floating around than there is base money. So keeping them fungible can be a juggling act on occasion. But for the most part, we the people choose to hold bank credit as our money rather than cash. And, in fact, it is the limited availability of cash in the system (its relative "hardness") that keeps our money stable in unit value.

Think about it this way: We are free to choose cash at any time. And when we go to the bank to exchange our credits for cash, we put that bank under pressure to come up with cash that is relatively "harder" to come up with (more limited in volume) than credit. Let's say, for example, that "demand deposits" (those that can demand cash on the spot) are ten times larger than the total volume of cash in the system. Is this good for our money? Yes, because it means that the reference point unit we use is in limited supply, which keeps a vital tension on the overall system. The operations the bank must do to come up with our cash (sell off some value) maintain value in our credits.

Carl I understand that you think there will be a hyper-deflation, when the loss of confidence event happens, as the Fed will not print money, like they are doing these days. I am not sure why they will stop.

It isn't about bull markets or bear markets, Greenie. With apologies to the hucksters at KWN and their ilk, that sort of homely vantage point simply doesn't capture the essence of the action in the U.S. bond market or the physical gold market. Equally, the notion of contrarianism has little to nothing to do with what is under discussion-most of the time-on this blog. But since you asked,

"How many people around you talked about buying gold in 2000-2001?"

About the same number that talk about buying gold (physical gold that is) now. The sentiment, amongst those where sentiment is measured, hint they don't tend to be "giants", hasn't markedly changed even as prices have.

Whenever I think about the possibility of a shortage of physical cash in a hyperinflation, I remind myself of the $110 billion worth of new $100 bills that is sitting around in vaults, possibly in better condition than has been reported.

The point is, the only thing 'free' in the free market for USTreasuries, is the free money the Fed are using to put a bid under it. I suppose they buy it all with USD found under the rock when the pixies left it there after they bought some assets from the Fed's balance sheet, not just-in-time manufactured.

Dr. Octagon said..."Carl - Why would there be a collapse in dollar-denominated credit money, but not in physical cash?"

It appears that you're missing the point. A collapse in the value of the dollar is just that, it affects both physical and credit dollars exactly the same, with the only difference being, credit dollars have a documented history of going "!POOF!" when they go bad.

The problem is that the entire "Monetary Plain", with an estimated notional value north of $200T, runs on credit dollars.

So there they are, sitting on a pile of paper assets DENOMINATED in dollars that aren't worth spit and bank accounts full of credit dollars that aren't worth spit. Do you see what I mean?

And from this vast expanse of nothingness, we are told to expect hyperinflation to arise...

Dr. Octagon said..."Carl - Why would there be a collapse in dollar-denominated credit money, but not in physical cash?"

Imagine we get 3 months of 5% inflation per month (not yearly but monthly inflation). Now someone thinking it will go like this for 10 years will see what his money is worth after 10 years of such high monthly inflation. You get 0.95^120 or .0021 so this guy might be willing to pay 20 cents on the dollar for that bond. But anyone who understands the history of hyperinflation and how the inflation rate increases till the money is totally worthless in well under 10 years he won't pay anything for the bond. In this example cash is down 15% in 3 months and the value of a 10 year bond will collapse to nearly nothing.

Thanks to e_r and Jeff for explaining monetary base and bank reserves to Carl.

Often I have this feeling of a really clear view of things, once I have finished reading a FOFOA article.Then I routinely jump to reading all the comments and it suddenly feels like plunging into kindergarten after attending an enlightening lecture at a University or maybe a good TED talk.I really enjoy a good debate, but IMHO it is slightly annoying when 80% of the comment section have to revolve around the most basic stuff. Basic stuff that is even off-topic to the original FOFOA post (Topic is I vs. HI, not D vs. HI just to remind you).

So, now on topic: It's NOT the stock of dollars in the monetary plane. It is all about the constant flow of dollars from the fcking USG!

Anand Srivastava said... " Carl I understand that you think there will be a hyper-deflation, when the loss of confidence event happens, as the Fed will not print money, like they are doing these days. I am not sure why they will stop."

I don't think the Fed will stop "printing", It's just that it won't be enough to make a difference.

So there they are, sitting on a pile of paper assets DENOMINATED in dollars that aren't worth spit and bank accounts full of credit dollars that aren't worth spit. Do you see what I mean?

Yes. Here that collapse in the value of the dollar is called 'hyperinflation'.

And from this vast expanse of nothingness, we are told to expect hyperinflation to arise...

No, that collapse of USD value was hyperinflation.

In response to the onset of that hyperinflation (collapse in the value of the currency), you are told to expect a response in the form of buying up anything that is failing and threatens to take the banking system down with it in a deflationary spiral. The front lawn dump, where any and all failing debt is bought by the Fed with fresh base money. In a futile attempt to forestall this deflationary collapse of the entire system, which you correctly foresee but mistakenly compare the USD of today to the USD of the 30's.

Plus also the USG will print and spend whatever it takes to secure the vital supplies it needs for all that lovely governing, while the dollar will still get things at some price.

Plus also foreign holders of that currency are likely to try to get something more useful with it, before it becomes completely and utterly worthless to them.

All of these will push the price hyperinflation into overdrive. But the initial hyperinflation was the significant devaluation of USD by those who need to accept it in payment for their goods and services. There's a whole world out there using other currencies and competing with the US to buy goods and services. Your purchasing power in USD might have just halved and halved again, with no end in sight, but not all of their currencies did.

There will be a deflationary collapse of the economy due to almost everyone's inability to pay for anything beyond basic subsistence. It just won't look like the deflation you're waiting for, with falling prices when denominated in USD. The sticker prices will go up and up. Not in a "feel-good wealth-effect" way, but in an "I couldn't even afford to feed my kids yesterday, when will this end?" way.

This is the view widely held at this blog. Either you can see it or you can't. But you won't convince many here to go back down the mountain and rejoin you at base camp Alpha. Bonne journée.

Here's FOFOA: The deflationists miss it because they are so meticulous in their observations and calculations that they can't see that the collective will always changes the rules when things get really painful. The political will (which is the same as the collective will in my lexicon) always does whatever will lessen the immediate pain, even if it will most certainly cause greater pain later. This is the part that is as reliable as the sun rising.

Yes, we will have a grand deflation... denominated in GOLD!

Carl is not revealing anything grand with the term hyper-deflation, he just fails miserably to see the political will factor.

"Picture a world without a medium of exchange, then think about where your next meal will come from."

Yes, Carl. We have. The implication being that without the anchor of a gold-backed currency, the dollar-denominated price of a tin of beans is infinite in your scenario. Unavailable at any price. That's hyperinflation.

Carl: "If a collapse in the value = hyperinflation then why didn't Iceland go into hyperinflation?"

Hyperinflation is a positive feedback loop that feeds on itself. It is a process. Not every devaluation results in this feedback loop. It seems to take debt over 80% of GNP and deficit over 40% of government spending and the ability to print money. Once in the feedback loop it is very hard to get out till the money is totally worthless, though this might take a few years.

In case you don't retain what you read (since you told us you already went through the FOFOA archives). Now can you go back to your blog and read up some more or at least not pretend you know everything?

Let's take a look at what happened in Iceland ten months ago. Practically overnight the Krona lost more than half of its purchasing power. Luckily the Krona was a small fish in a big pond and a number of bigger fish came to its rescue including Germany, the Netherlands, the UK, Norway, Sweden, Finland, Denmark, Poland, Russia and the IMF. These big fish put a bottom under the Krona waterfall, but for the local Icelandic population, the damage was already done.

Call it a currency collapse, a hyperinflation, a devaluation or a repudiation; call it whatever you want. But the cost of everything people use and need in Iceland doubled or tripled in one month. And at the same time, the things they counted on as a store of value, the banks, real estate and the local financial industry collapsed. Hit from both sides! A brutal double whammy!

You see, in Iceland almost everything produced is an export, and almost everything needed is an import. And imports and exports are the hardest hit in local hyperinflations.

Local hyperinflations primarily affect imports and any domestic product that can be exported. In other words, if it can be sold somewhere else for better money then it EXPLODES in price. But locally produced and consumed products and services become quite cheap in real terms. And by real terms, I mean for those who have some gold! This includes real estate, which is difficult to import or export!

But who is going to come to the rescue of the biggest fish of all? Who is going to bail out the dollar and put in a bottom? The aliens? I have a sneaking suspicion that the dollar's collapse will be a little different (read: worse) than past recorded events. It will certainly be a sight to behold. Just think about it; Where will you be, what will you be doing, how will you react, and how will you be feeling when it starts? Gold delivers a LOT of peace of mind in this regard!

50sQuiff said..."Yes, Carl. We have. The implication being that without the anchor of a gold-backed currency, the dollar-denominated price of a tin of beans is infinite in your scenario. Unavailable at any price. That's hyperinflation.

Gold is irrelevant to the issue.

I'm not talking a tin of beans at an infinite price, I'm talking no tin of beans and nothing to price them in even if there were.

So what does the supply of money have to do with the catastrophic loss of confidence that is hyperinflation? Yes, the catastrophic loss of confidence drives prices higher. This makes the present supply of money insufficient to purchase a steady amount of goods (USG junkie fix). True balls-to-the-wall hyperinflation requires a feedback loop of both value and volume. Value drops, so volume expands, so value drops more…. Without the feedback loop, you simply get the Icelandic Krona or the Thai Baht. With the USG in the loop, you get Weimar!

Of course it's relevant to the issue. It's where deflationists go wrong in taking their cue from the Great Depression. A Dollar is not a Dollar and no amount of sophistry will change that.

Without an anchor, goods unavailable at any price is hyperinflation. $10,000 of your FRNs will not buy my tin of beans if we're both starving. Your money isn't worth anything in your scenario. Do you acknowledge that?

Then presumably, you think that when tins of beans are once again abundant it will be business as usual. The price structure will revert to valuing beans at $1 in precious paper money and the US Dollar will only consolidate its position as global reserve currency!

Aquilus said... "In case you don't retain what you read (since you told us you already went through the FOFOA archives). Now can you go back to your blog and read up some more or at least not pretend you know everything?

My, my, my! That was unexpected, and totally uncalled for.

According to historical data, the Iceland Inflation Rate barely topped 18% during that time, hardly hyperinflationary.

No Carl, bring it. If you come here to piss on FOFOA's forum, and act all dejected that your questions are not answered, you cannot put this show on when you get direct answers and you pretend you did not.

The bullshit stops NOW. ENOUGH. Either ask and answer in a civilized manner or GTFO. I did not stutter when I said that.

50sQuiff said... "Of course it's relevant to the issue. It's where deflationists go wrong in taking their cue from the Great Depression. A Dollar is not a Dollar and no amount of sophistry will change that."

If a dollar is not a dollar and credit dollar is not a dollar or a dollar, then what happens to a credit dollar when the value of the currency collapses?

Does it keep functing as it it were a dollar or does it revert to its natural state of debt, which is a demand for a dollar?

More hard facts on Iceland, Carl. Don't complain you don't get any direct answers. The game is up. Now put up, or shut up!

On the Wednesday night, 8 October 2008, the Central Bank of Iceland abandoned its attempt to peg the Icelandic króna at 131 krónur to the euro after trying to set this peg on 6 October.[11] By 9 October, the Icelandic króna was trading at 340 to the euro when trading in the currency collapsed due to the FME's takeover of the last major Icelandic bank, and thus the loss of all króna trade 'clearing houses'.[12]

131 to 340 in four days is a collapse equivalent of 159.5% “inflation” in 4 days. Comparing that to recorded hyperinflations, that’s infinitely faster than them all. It is true that you can’t directly compare a currency collapse and a running hyperinflation in the same way you can’t directly compare stock to flow. And then, of course, they stopped trading and “a number of bigger fish came to its rescue including Germany, the Netherlands, the UK, Norway, Sweden, Finland, Denmark, Poland, Russia and the IMF.”

Also, Commercial króna trading outside Iceland restarted on 28 October, at an exchange rate of 240 krónur to the euro, after Icelandic interest rates had been raised to 18%.[17]

131 to 240 is still a devaluation equivalent to 83% inflation. And that was over 21 days, or three weeks.

I also posted the facts behind the almost hyperinflation that could not happen without the feedback loop that is the 600 pound gorilla in the room you seem to want to avoid talking about.

So, don't try to create another straw-man by picking pieces of the topic and trying to slay them, address the 600 pound gorilla directly.

And don't give me the hurt soul "thank you for no insults" play. Insults went directly with exposing your actions. Have a normal dialog, and no one here will insult you, come up with straw-men and sophistry and there will be no shortage. I said, and I repeat, ENOUGH OF THE BULLSHIT.I will not have you not disclose the rules of your game until after the fact, and then declare victory. ENOUGH.

Carl: "So if i'm reading that correctly, it verifies that a collapse in the value of the currency is not hyperinflation, is this correct?"

A finite drop in the value of the currency, say 30% or 50%, and then stability is not usually counted as hyperinflation. Hyperinflation is an ongoing thing. It is like a panic that feeds on itself. The fewer bonds people hold the more the central bank has to buy, but the more the central bank prints money to buy bonds the fewer people want to hold the bonds. Feedback loops like that. Hyperinflation is where government can not help but print money. They are spending much more than they get in taxes and nobody wants to lend them money. Things are "out of control". A finite drop is not like that.

While you are indeed correct for the current time, this is what I was referring to about cutting zeroes off in Zim:

On 2 February 2009, the RBZ announced that a further 12 zeros were to be taken off the currency, with 1,000,000,000,000 (third) Zimbabwe dollars being exchanged for 1 new (fourth) dollar. New banknotes were introduced with a face value of Z$1, Z$5, Z$10, Z$20, Z$50, Z$100 and Z$500.The banknotes of the fourth dollar were to circulate alongside the third dollar, which remained legal tender until 30 June 2009

Was curious what you guys thought of Janzen's Ka-Poom theory. We go from bouts of deflation like in 08/09 then get reflated with asset buying every few yrs. Seems like in this scenario we would kind of bumb along the bottom from negative to positive inflation but no HI or sustained deflation. Just curious what you guys think.

I guess at some pt the fed would lose credibility from all the asset buying but I suppose could go on for a while, don't know.

Sorry but, I don't read that as indicating that Iceland did not have hyperinflation, there is no indication of that position, however it appears to contain loads of info that suggests that there was hyperinflation.

And "picking" key components of a post to address is a valid form of forum debate. If people didn't do that, the thread would be full of post repeating the same thing over and over again, effectively killing all forward progress.

Vincent Cate said..."A finite drop in the value of the currency, say 30% or 50%, and then stability is not usually counted as hyperinflation. Hyperinflation is an ongoing thing. It is like a panic that feeds on itself."

I agree. So I think we have effectively put to rest the notion that a collapse in the value of a currency = hyperinflation, it does not.

Hyper-deflationists are a funny bunch. IF we do have any form of hyper-deflation, it will be the things that THEY own and NOT the things that they NEED that will hyper-deflate. So, careful what you wish for. Comprendre?

Aquilus said... "I also posted the facts behind the almost hyperinflation that could not happen without the feedback loop that is the 600 pound gorilla in the room you seem to want to avoid talking about."

I didn't see your original post explaining hyperinflation theory, barely caught this mention of it.

I'm not disputing the theory, that's why I usually don't bother to comment on it.

I'm questioning the roll of credit currency that is not, by law and definition, money and carries no obligation on the Fed or the USG to make good by printing excessive amounts of money or cash.

I'm questioning the global banking system's ability to continue, unscathed after a precipitous drop in the value of their primary medium of exchange, credit dollars, a value that supports their existence as credit dollars, which supports financial market instruments that have been estimated to be at between $98 to well over $200 Trillion dollars in value.

It is my theory that they can't and it is also my theory that they will collapse into a heap at any notion of an official devaluation of the FRN, well before any hint of excessive Federal Reserve Note printing.

When bond prices crash some banks will collapse too. How would that stop the feedback loops of hyperinflation? The government will print more money to bail out the banks. This hyperinflation thing has happened more than 100 times. Banks failing does not stop it.

Loss of confidence is the spark that lights the hyperinflationary fuse, but you already knew that from reading this blog. And printing is the palliative response to that loss of confidence, but you already knew that from reading the last 200 comments of this post.

Your thesis is that the Fed will not buy up failing debt with base money further fueling hyperinflation beyond that initial spark. Here at FOFOA, we believe the Fed will indeed do exactly that for reasons that seem to escape you.

You can stop banging your deflationary skull against this hyperinflationary blog wall. Try MISH's blog. He has a whole host of characters that will love your story.

"I don't think the Fed will stop "printing", It's just that it won't be enough to make a difference."

I completely agree w/ KindofBlue. Hasn't the last 4 yrs showed us they will do anything and everything as FOA said to save debt at all costs. The Fed will buy all mortgage bonds etc. What would make the Fed stop? Bernanke decides hmm ok I'll stop at 3.5 Trillion sounds like a good number.

Sigh.. I just really have to wonder about the coming psychological shift when I read stuff like this. We can easily be waiting another decade. People are idiots..

But there has been one investment, especially since 1999, that has worked out phenomenally well for the otherwise hapless Japanese investor: Gold.

Alas, they’re dumping it. And when they’re dumping it faster than internal demand can absorb it, the surplus is exported and shows up in the trade statistics of the Ministry of Finance: in fiscal 2006, Japan became a net exporter of gold for the first time since the ministry started tracking it in 1988. Net exports rose every year and built into a crescendo in fiscal 2011, ended March 31, when they surged to 135 tons, an astounding 61% jump from fiscal 2010.

M said... "Whether FOFOA's definition of hyperinflation happens or not; it doesn't change the onset of freegold. Or do you think it will?"

I haven't really considered freegold, but what I've gleaned from posts I've seen on the subject, it appears to be a good restart option.

M said... "If Bernanke stops buying bonds or supplying the economy with base money during a crisis, it will not result in a dollar rally. Agree?"

I don't think Bernanke will survive the coming cascading collapse of all credit/financial markets and the total annihilation of the "credit is currency" illusion that drives them, which may take out the Fed as well.

Physical gold is savings -- not an investment. This is Buffet's error in evaluating its worth.

(shouting)

"Hey Warren, gold didn't need a bailout".

A wealth shift -- gold's rise -- is occurring right before our eyes, but note that this period of suppression and currency debasement is only giving us the happy illusion that it might be an investment. Hell, the investment of a lifetime in our time!

Nice to see you here. I spent a lot of time at your blog quite a while back and found a lot of information that was helpful to me at the time. I also found your commentary on the material you had collected lucid and easy to understand.

I see you are a man with considerable patience as well. Suffering an unwelcome fool lightly in the discussions here whereas Uncle costata, having just caught up with todays offerings, finds his patience tested beyond endurance.

To paraphrase an often quoted observation about sustainability - that which cannot be endured won't be endured.

just wanted to pop in and say how thankful I am to not just Fofoa but just as much to all the people who are commenting and debating. To be honest I'm very happy when somebody like Carl drops by and kicks the hornet's nest a bit. This stimulates all the other brilliant minds around and their responses and answers are very helpful to me to understand many things I had previously missed. So I would like to say special thanks to all the people who instead of the 'troll' comments instead reply with patient answers and explanations. It is so very helpful! I have so many unanswered questions and I'm so very happy to get multiple light spots on some questions, especially from multiple light points. I say this as a person who's read all of the archives, many multiple times as well as the comments, but this is such a compelx (and fascinating) subject that many questions still arise.

For example one that I keep struggling with is: it seems to me like a lot of the descriptions of freegold have already happened, so I'm still often struggling to realize the major differences that are going to happen:- Separation of currency for trade and gold/others for saving: already happening, many have known this for ages and are doing them now. - From what I understood the big difference might be that in freegold governments will be allowed to dillute the currency based on their people's foolishness, but Gold will show that and keep them in check. My question is, how will that not be a major incentive for them to think of some new scheme to keep this policeman from controlling them?

On another line of thinking I would love to second the request to Fofoa that he write an article explaining how the current state of the Euro doesn't change Another's original opinions about it being the salvation. If he was around now, wouldn't he say something different? Why would the politics going on now not change things?

To be honest I do have a slight doubt about the doomsayers: yesterday I saw on CNN an interview with a german official, a french one, and a greek one, and to my surprise each of them was inspiring confidence. The german one seemed to be aware of the troubles of the others, the french one to my shock indicated with inside knowledge that Hollande might dissapoint it's socialist voters by in fact doing some verbal trickery and keeping spending in check, and even the greek one seemed surprisingly coherent. The only super angry panicked/judging doomsday person on the show seemed to be the english/american interviewer. I also got a similar impression from german news and radio. Still, I'm wondering if I am not only deceived by smooth talking politicians, which as we know can calmly promise smooth waters even as the money/infrastructure of the whole system is crashing. So I would really like it if it was possible for Fofoa or other smart minds around here would explain how things are okay in this area. Often I get scared at people copypasting old passages written 10+ years ago. I mean they're super smart and eye opening passages that are very pleasant to read and erudite, however I do wonder if that same person wouldn't write a different smart sounding philosophical article. It seems to me like a lot of the premise of Another/Foa is that there are smart people in charge, steering the boat in a valuable direction... but what if since then all the wise men have retreated out of the system like the german officials being replaced by italian/french thinking? Beautiful words are awesome, inspiring and thought provoking, and I do believe that politics can sometimes be just a sideshow as the puppet masters controls from the background BUT one of the key insights that I saw in this community, is that indeed people do change the rules of the game, and that all the best laid plans can change when there's a political will to do something different. So, do the facts tell a much more different picture behind the scenes than all of the news? How are these facts stronger than the economics facts presented at say Zerohedge which constantly say it's all gonna crash and the whole EU thing is just a political dream but the numbers/money/power say something different?

Thank you very much to everybody here, and of course especially to our gracious and so very inspiring host who carried the flame and created such a great place for us to enjoy.

After a violent earthquake, coastal erosion has caused any number of dwellings to crash into the sea. Presumably the deflationist would immediately call his realtor, ready to buy the remaining houses of our coastal village, which can only soar in value.

In reality, the owners of those now uninsurable properties will sell for anything they can get. They will have their sights firmly set higher ground, far in land. The sunny golden uplands, if you will. Property prices there might see a little bit of appreciation.

JoyoflearningGold will become a physical only market. No more paper trade to distort the price. Gold will then be a focal point for savings and reserve assets. Bonds and bank deposits will compete with gold for peoples savings. So you can imagine interest rates will be high to entice savings into bank deposits but that will keep a lid on unproductive lending. A socialists worse nightmare.

Some excellent questions. The knowledge that my comments help others is why I sometimes try to answer what I see as senseless questions. There is a line though in terms of politeness.

The most important difference yet to come is the destruction of the paper gold or gold contract market. While contracts for gold exist trading as if it were gold, we have not yet arrived.

They surely will try schemes in the future, but it wont matter much once the people have realized that gold is the savings instrument par excellence, because they have never been able to create gold. So some short term schemes by governments may work on short timeframes, but there will be nothing possible like the current fictional markets.

As regards the euro, it's not so much that there are smart people at the helm that matters than that there were very smart people at the helm when it was designed. As long as the MTM structure remains in place almost nothing they do matters. The current paper system was always going to fail, the MTM method is the lifeboat that will save the currency.

Of course it helps if they steer the boat better, but it was always going to sink, it was designed with that in mind.

I believe what Carl is describing is like a final flash at the bottom of Exters pyramid. When it happens, it's high up in the "financial stratosphere", and it's so fast there is no time to print cash. More like a hyper-dislocation, where everyone is left wondering what the hell anything is worth.

Just out of interest Carl, assuming I'm close to what you're getting at, what would you rather be holding when this happens. Cash or gold?

HI is not only what FOFOA describes with that monetary stuff. Sure it is, when the physical plane stops to bid for the $-plane (or at least starts to have doubts therefore needs to be convinced continuesly by more paper). Okay, so far I guess we can agree.

What some people are missing (incl.FOFOA): Only the physical plane participants which have a free choice (not) to show up at the physical market place.If you have a $-mortage on your home and you want to keep it, I guess you show up at work to keep it that way.... OR ASK YOURSELF, WHY DO YOU GO TO WORK TO BE PAID IN $ FOR YOUR PHYSICAL WORK/STUFF?So the only "free choice" market participants are "the rest of the world", outside of the US. So ask yourself, how realistic is it that somebody steps out of the IMFS and says, no thanks, no more $ to buy $-bonds, I keep my physical stuff? How "free" are these market participants really? That is the only question to pose, until now, I havnt seen any real argument on that.Greets, AD

DP,yes sure, why not €, because plenty of new onces have just been printed and Eurozone is in recession.... good idea, although you dont know in which countries you can pay with them next year, want to buy some greece olive oil?Greets, AD

Yes please, I would accept € for payment. Because I know, if things really are going pear-shaped, I can immediately lock in an exchange for gold and then take that to Timbuktu, or Constantinople, or anywhere else I want to buy something.

You see, the European gold reserves are far better, far more credible than the US gold reserve, simply because they engage in a two-way gold market, and have for decades. The US gold has been hoarded and locked away for more than 30 years, never deployed in case of emergency. The European CB's took a lot of flak for selling gold over the past two decades, but that action is precisely what makes them so much more credible (and valuable!) than the US gold hoard. Any trading partner knows full well that if all else fails, gold will be paid.

No new ounces will be printed by the ECB. But a whole lot of € will, if the gold reserves valuation is climbing rapidly and they want to keep their euro from rising against real goods (single mandate: 2% inflation of real goods prices in €). So, yes, I might not choose to hold onto too many of those € for very long, but as a means of payment for my services they'll be perfectly acceptable I think.

DP,"You see, the European gold reserves are far better, far more credible than the US gold reserve, simply because they engage in a two-way gold market, and have for decades." How do you figure? Any facts, proofs?The 500t? By the way, since you are talking about PHYSICAL, where are those stored? Do you have any claim to exchange your € against those (no matter for what price, just for the principle)?Please let me know,Greets, AD

the key to the kingdom: "supporting foreign dollar settlement with CB storage."

Yes, the transition is not about the debtors, but about the producers and a change in how they choose to save their excess production. We walk in the footsteps of giants.

And here we find the key to the kingdom: "supporting foreign dollar settlement with CB storage."

All currencies have the value of whatever they can buy. In a sense, they get their value from price tags offering prices denominated in their unit. But this MoE (medium of exchange) usage demand is not enough for the dollar. It is not enough that foreign goods are priced in dollars. The dollar requires another kind of usage demand: SoV (store of value) usage.

The reason for this is simple. The US is the only originator of new dollars and the US has run an unending trade deficit for 37 years, so the US has been exporting an unending stream of dollars for 37 years. To some extent, that pool of external dollars can circulate outside of the US as long as some foreign goods, like oil, carry a dollar price tag. But that is not enough.

Without foreign CBs supporting this system of foreign dollar settlement by mopping up the unending glut of dollar emissions, the market price mechanism would collapse the US trade deficit in a heartbeat.

JR,"Without foreign CBs supporting this system of foreign dollar settlement by mopping up the unending glut of dollar emissions, the market price mechanism would collapse the US trade deficit in a heartbeat." Sure, no doubt about that. What makes you think that anybody dares not to support it? FO(A) was already wrong with his predictions 13yrs ago (actually those prediction lasted now for over 40yrs). What makes you believe that this will ever change? WHY? & WHO? (those would be interesting, regardless of when).Greets, AD

For 312,000,000 people, the $ is legal tender. For the other 6,682,000,000, not. Which group is likely to be the first to say,"no, thank you, I have enough?". Especially as they already have about $5.6 trillion. Why keep accumulating S & H Green Stampswhen the redemption stores have been closed for years. WHAT arethey saving FOR? And what will we offer them when they refuseour $? Our remaining un-pledged collateral? I doubt there is any.

AD is following Desperado down that path. 'Stick 'em up world, this is a robbery! Dollars or drone strikes, take your pick! Give us your goods and we give you this paper!'

AD wonders where the physical is:

FOFOA: As for where the gold is, the official Eurosystem reserves include all the members' reserves. And they are physically in their respective countries. But they are now Eurosystem reserves in that they cannot be unilaterally squandered. In a monetary sense, the Eurozone is now a whole.

Jeff,I am really not sure if I am cheering for that "punctuation", actually I really dont care and I dont think, that it will change much (just remember the Freegold-Valhalla aka India discussion).If I had a choice, I rather like it the way it is right now or in the past (shall the americans build their own TSA-FEMA-gulag for themself if they like, none of my business, everybody gets what he deserves), instead to suffer HERE in the EU under the eurofascists.Greets, AD

Paul I said... "I believe what Carl is describing is like a final flash at the bottom of Exters pyramid. When it happens, it's high up in the "financial stratosphere", and it's so fast there is no time to print cash. More like a hyper-dislocation, where everyone is left wondering what the hell anything is worth."

Precisely.

Not only wondering what the hell anything is worth but also what the hell medium to price it but, most importantly, WHO'S GOING TO PAY IT???

We're talking MULTI TRILLIONS in LIABILITIES here, which, by the way, is the flip side of "credit as currency".

What I've described almost happened in 2008. Wasn't it the Fed and the Dollar that kept the monetary plain from collapsing completely?

And now you're talking about devaluing the currency that drives the entire Monetary Plain and the Shadow Banking System?

I believe "Hyperinflation" should be the least of our concerns.

Paul I said... "Just out of interest Carl, assuming I'm close to what you're getting at, what would you rather be holding when this happens. Cash or gold?"

Yes Paul, it is exactly what I was getting at and I would be holding cash and stashing gold and silver, those will be for the restart. But the chances of me living long enough to put them to use are slim at best.

Carl,What happened in the 2008 crisis? Did the Fed/USG sit on their hands and let the system die, as you would have us believe they will do in the future, or did they kick the can can down the road and bail out the system, as we have proposed they will in the future?

Carl:"Wasn't it the Fed and the dollar that kept the monetary (plane) from collapsing completely.". Why yes, it was, and we believe they will do it again, on a scale so grand that it will make your head spin (even faster than it already is).

"Yes Paul, it is exactly what I was getting at and I would be holding cash and stashing gold and silver, those will be for the restart. But the chances of me living long enough to put them to use are slim at best."

Sounds like me 6 months ago. At least if you're going to hold cash, make it nickels. That way you are hedged in either direction. Well, you might think.

JMan1959, the hypothisis is the collapse in the value of the dollar, a rejection of the dollar as a viable medium of exchange.

In 2008, it was the value of the dollar as a medium of exchange that put a floor underneath the collapsing system. The quantity of dollars were minuscule compared to the multi-trillions in credit it saved.

Now, we're talking about a system that is collapsing because the dollar no longer has value as a medium of exchange, so adding more dollars that have no value as a medium of exchange, will not rescue a system that is collapsing because of that loss of value.

Jeff,"...and torturing them to death while confiscating their stashes, in USA or Europe or anywhere else."

It looks to me that you havent read the news lately (and in earlier days), or how much gold does Lybia still hold, how much Iraq? Well, in earlier days they called it "nationalisation" (with threat to send you to prison, if you are not "nationalistic" enough) LOL.

But what is even more sick, is, if somebody just kills for the prestige like in Vietnam, but hey arent these people just human with good reasonings and a good PR for their actions? Who cares about the civil bodycount if it is done "for the good"?

I dont want to start a political discussion and I dont judge anything of that, I just want to point out, look at things how they are, not what your "moral presstitutes" tell you or your confirmation bias wants them to be.Greets, AD

This was interesting, not for the premise of the article but for this snippet.

'the 17th half yearly report of RBI on management of foreign exchange reserves, in which the apex bank has said, “The Reserve Bank held 557.75 tonnes of gold, forming about 9.2 per cent of the total foreign exchange reserves. Of these 265.49 tonnes are held abroad in deposits or safe custody with the Bank of England and the Bank for International Settlements.”

Carl,Even in HI, the fiat doesn't lose all it's value at once. The fiat still has value, abeit exponentially less as the feedback loop continues. Once confidence is lost, they either print to fund their spending habits, or they stop spending and die. You don't honestly think they will immediately go into the Draconian austerity measures necessary to stop spending and kill off their own, do you?

Dear me. I'm having to be very careful which comments I read. Now there seems to be a huge chance I'll 'step in it' by either wasting my time reading certain commentators or almost as bad the earnest responses to them.

JMan1959 said... " Carl,Even in HI, the fiat doesn't lose all it's value at once. The fiat still has value, abeit exponentially less as the feedback loop continues. Once confidence is lost, they either print to fund their spending habits, or they stop spending and die. You don't honestly think they will immediately go into the Draconian austerity measures necessary to stop spending and kill off their own, do you?"

Personally, I don't think a feed back loop will have much of an opportunity to build before the credit system as a whole collapses.

If the credit system collapses, austerity will be imposed, not by government but, by a total absence of currency and goods.

Into this hellish dellima government printing and spending will seem like a god send...

Kindof like the OK corral around here this day. I ordinarily think dissenters add to the depth of the conversation, but I am growing weary of the cagey back and forth, and don't think there is much worth in the discourse.

Carl, this is a friendly place. Put your ideas out there in a non combative way, and friendly people will engage and enlighten you.

As people of low net worth, my family must allocate resources between wealth reserves (gold), and stockpiling of those things that we will need during the transition. So for me, the duration of the tempest is something I am most interested in.

Right now, I think we are set for about 45 days of madness, after which we have no reserves. We live in suburban America, 20 minutes from a big city. In a breakdown scenario, I can't imagine the local police covering our area over more densely populated areas. We are probably on our own.

We have encampments of very poor immigrants nearby. When SHTF, I fear there will be unrest, and increased incursions into our neighborhood.

LIke many others here, I don't know many (really any) who are aware of the global economic situation. It's so hard to get through the day knowing that if I tell people what I have learned through this blog, I will get only glassy eyed stares and a bad reputation as someone perched in the crazy tree.

So I count on this community, and I throw out this question to the group: How long will an (US) HI event persist once initiated, and how long before wages catch up with the event?

Dave Simone said..."Carl, this is a friendly place. Put your ideas out there in a non combative way, and friendly people will engage and enlighten you."

Thanks for the advice.

I attempt to be frank and concise in my arguments, perhaps it is my frankness that is being misconstrued as hostility. As for friendly, I think I'm being very friendly, even when snide comments, like your inference that I need to be "enlightened", are flying at me and around me from all sides. I do try to ignore most of it.

Dave: "How long will an (US) HI event persist once initiated, and how long before wages catch up with the event?"

I don't think we can really say. Many hyperinflations take a few years. With the US dollar being the world reserve currency there is some reason to think it might have more inertia and move slower. On the other hand, with the Internet and all this could happen really fast. In many hyperinflation people did not understand what was going on. They felt there was not enough money and wanted the bank to print more without understanding things. But now people will be able to search the net and read up on it. For example, here is the math for hyperinflation:

http://pair.offshore.ai/38yearcycle/#hyperinflationmath

This is the world currency. TV will be explaining it, blogs will all be covering it. All kinds of people will be investigating. Very fast people will understand and when they do they will get out of the currency. So my guess is it happens much faster than normal.

As soon as the giants realize its the last control valve they have left to apply any measure of control.

Jonnie might be limited in his options to respond to a financial system that has zero bearing on the realities of his life because specialization has reduced his ability to produce items for trade without the herd, but at some point the crowd refuses to contribute to a dead end system that transfers their productivity for the promises of continuing to receive the right to be alive in return.

From that vantage point, could be a while. On the other hand, if the line managers see what's inevitably coming, they could reconfigure the operating contract in a flash because the new one has already been drawn up.

At any rate, it's the point at which the collective realizes the balls in the air are irrelevant.

"At any rate, it's the point at which the collective realizes the balls in the air are irrelevant."

Yes, if there is a credit hyper-dislocation and the machine seizes up, the mob will still be left with their price memories. Computers can switch beliefs a lot faster than humans can.

What happens next will be determined partly by "cash supply-line functionality". If the machine still functions at the print-truck-distribute level, then we may see the traditional hyper-inflation scene play out, as described by FOFOA (with Treasury/FED leading the way).

This belief, however, maybe be akin to "fighting the last battle".

If the mob overnight find it's credit worthless, and the ATMs fucked, will there be a traditional hyper-inflation?

In my opinion this scenario is low probability, but can anyone say it's impossible?

NS,about what camp I am in, I finally made up my mind: "Superstagflation".

In a certain way I see the world/IMFS/EU(RO) more and more moving to an "economy" like in former East Germany.Remember people in the DDR had plenty of funny printed up money over decades, but still never a (hyper)inflation occured (because they specially had a StateDepartment of price controls, see above how I describe like I see it working today). Sure, back than, the selves in the stores once in a while were left empty. Today they are not, because they are filled with china plastic crap, but if you remove the china crap, we are almost all already in the DDR.

Greets, AD

P.S.In the EU-zone we already start to have real price controls right now: telephone, energy, house financing....

You wrote: "If the mob overnight find it's credit worthless, and the ATMs fucked, will there be a traditional hyper-inflation?"

Yes there will. In real "traditional" balls-to-the-wall hyperinflation yes, "the mob overnight find it's credit worthless" and "the ATMs fucked". Credit and ATMs (and wages) are not the distribution mechanism of true, in-your-face, real honest-to-goodness Zimbabwe-style wheelbarrow hyperinflation. And that's what I'm predicting for the good old US of A.

That final mechanism is always government spending. At some point the market will accept nothing but cash so the government prints it up in pallets. But prices are rising faster than it can print enough money (there's always a shortage of money in hyperinflation), so G adds zeros to the bills to up its own purchasing power. This is the mechanism. And they don't give up until the law of diminishing returns (on adding zeros to new pallets) kicks in.

We commoners only get a hold of those big-denomination bills after the newer bigger-denomination bills come out. And we don't get our hands on them because our wages increased or our ATMs are magically spitting them out. We get them because the nominal price of our stuff which the government stooges are trying to "buy" off of us to defend the G's lifestyle has risen that much.

It's like this: As the G spends the shit out of its currency defending itself, your net worth in real stuff you've got in your possession will rise much higher than the total amount of currency physically within a hundred miles of you. So your net worth could be $50T while there's only $10T in cash total in your town. So you could never liquidate for cash. And you wouldn't want to do that anyway. Only the G's stooges are packing those special wallets!

"After the restandardization from silver to gold, everyone's net worth in silver has massively increased. Why? Not because there is much more silver in the world - because everyone's portfolio has been converted to gold, which has been revalued in silver. Thus, their purchasing power in silver, by the end of the transition, can and should considerably exceed the amount of silver in the world."

I'll bet at least a few of you can translate that into dollar terms! ;)

Yes, I understand your proposed mechanism for hyper-inflation being multiple zero notes via the government sector, rather than ATM distribution. Is it possible that the modern light-speed nature of both credit and information could result in a short circuit of this process, exacerbated by system breakdown?

Isn't it possible that unlike historical hyper-inflations, where the main feedback was prices, limited by the speed prices could change, today's feedback would be direct understanding of the process, limited only by the speed information is disseminated?

The end result is the same, except for the absence of trillion dollar notes.

After reading the Moldbug piece you link to in your comment above, I would say that it is worth reading by everybody here.In particular, I was impressed by the the discussion of competinginterest rates (better understood as competing DISCOUNT rates)between 2 currencies, as in the gold vs silver example he uses asillustration. Thanks.

The moldbug piece was excellent indeed. Very reminiscent of an essay penned under 'John Law', referenced before on FOFOA, but also very worthy of reading for those who haven't fully been through the archives.

Unsure if you are following the comments. I have a query regarding the little tale linked by Aaron, referencing sharks.

It is that for every $77,500 taken in you 'spent' $65,000 on gold. As this story was meant to be an analogy of how to use the paper market to suppress the price of physical gold... I am unsure how this would be practical if you spend 84% of your takings on gold. Would this not have placed impossible pressure on the price of physical gold?

Liked your response to Carl by the way. Your vivid imagery created a disturbingly hilarious vision.

Since shale gas was brought up somewhere in this thread, here is Orlov's take:

http://cluborlov.blogspot.com/2012/05/shale-gas-view-from-russia.html

Cliffnotes:

- "The best-developed shale gas basin is Barnett in Texas, responsible for 70% of all shale gas produced to date. ... just in 2006 there were about as many wells drilled into Barnett shale as are currently producing in all of Russia. This is because the average Barnett well yields only around 6.35 million m3 of gas, over its entire lifetime, which corresponds to the average monthly yield of a typical Russian well that continues to produce over a 15-20 year period, meaning that the yield of a typical shale gas well is at least 200 times smaller."

- "Russia's proven reserves of natural gas amount to 43.3 trillion m3, which is about a third of the world's total. At current consumption rates, that's enough to last 72 years. Russian gas production is constrained by demand, not by supply"

- "Gazprom's price at the wellhead runs from US$3 to $50 per thousand m3, depending on the region. Compare that to shale gas in the US, which runs from $80 to $320 per thousand m3. At this price, the US cannot afford to sell shale gas on the European market."

- "why is shale gas being produced at all? Natural gas prices have fallen through the roof, and are currently around $2 per thousand cubic feet. This works out to around $70 per thousand m3. If shale gas costs from $80 to $320 per thousand m3 to produce, it is unclear how one might make any money with it."

- "It appears to have been something like the dot-com bubble: companies with no conceivable way of turning a profit using hype to attract investment and drive up their valuations."

- "there is no such thing as a global natural gas market. Yes, there are some LNG tankers sailing about, but that is very much a point-to-point trade. There is a closed North American market, a European market, and another market in the Asia-Pacific region. These markets do not interact."

Carl: "FOFOA said... "At some point the market will accept nothing but cash ~"

"And it is at that precise moment, the entire "Monetary Plain" collapses, before one single note is printed to meet that demand."

What really happens is that as interest rates go up and up and the uncertainty gets higher and higher the banks loan out for shorter and shorter time periods. You end up getting 10% loans for 1 month and such. In this environment you can't do long term loans. The interest is for much higher than any principle on a 10 year loan that it just does not make any sense. So long term financing breaks down. So people will be buying houses and business for "cash only". But it does not happen in an instant. It is a process. Remember always, hyperinflation is process, a positive feedback loop. All positive feedback loops end in destruction. But hyperinflation is not the end result or single event, it is the transition period at the end of the life of a fiat currency where the currency is less and less usable as a store of value but still has some use as a medium of exchange.

FOFOA: When I say the dollar has already hyperinflated in a near-monetary sense, I am talking about the number of dollars people, entities and even foreign nations think they have in reserve. Not in a shoebox, but in contractual promises of dollars to be delivered more or less on demand by somebody else. Claims denominated in dollars. This is how the vast majority of "dollars" are held; as promises to deliver more dollars. And this is why they are held this way. Because of the more in "more dollars." "Let me spend your dollars today and I will give you more dollars tomorrow!"The Credibility Waterfall...

I believe that the FDIC will ultimately be backed by blatant printing, as will almost every Pension Fund in America. And that this "cure" will be far worse than the disease.

This is exactly where we are heading right now. The road there is already paved.

I believe that the government's decision of whether or not to back the FDIC and the Pension Funds with outright printing is the only variable. The fact is that the banking and pension systems are already collapsing. At some point there WILL be a panic and the spiral will begin.

If they elect not to print replacement "credits" for everyone's deposits and retirement accounts [very unlikely], then we will have the system collapse in on itself and "all paper burns". Freegold as Another described follows.

If they DO elect to print replacement dollars [very likely - the electronic variety at first], then we proceed quickly to hyperinflation. And again, "all paper burns". And again, Freegold as Another described follows.

FOFOA says: Yes, electronic money credits can be spent just the same as paper money. But the actual electronic money credits that can be spent, cannot be destroyed, unless a bank fails and actual M1 deposits are not replaced by the government (FDIC). The only credit which is destroyed is money that has been stored in assets (asset deflation) and the ability of people to draw money into the present from their future productivity (credit cards, financing, etc...). The destruction of those do not reduce the money supply. They create "asset deflation", but not monetary deflation more commonly known as "price deflation".

So yes, we have more electronic money, and less actual paper money in circulation than either Zimbabwe or Weimar Germany. But that electronic money, especially if it is backed by the government through the FDIC, is just as hyperinflationary as the paper in Zimbabwe. In fact, it may be even more so, as it can be created cheaper, faster, and easier than physical printing...

Credit is the ABILITY to bring money into the present from the future. It is this ABILITY that has been destroyed. Not money.

Credit is essentially the ability to pull future capital into the present. Digital money credits are different, they are actually money, just like printed paper money.

Vincent Cate said... "What really happens is that as interest rates go up and up and the uncertainty gets higher and higher the banks loan out for shorter and shorter time periods."

So credit dollars continues to function as if they are money in spite of the demand for cash as payment placed upon the government because its' credit is no longer acceptable?

Are you saying that there is no correlative connection between credit dollars and the government's credit?

Are you saying that once a government issues credit into the banking system, as it did with the QE programs, that credit retains its "moneyness" even while creditors are demanding cash from the government that issued that credit?

If the government's credit is no good, then the banking structure's credit, which spans the entire globe, is no good.

Again I agree, hyperinflation is a process over time, but it is also a physical currency event, credit cannot drive hyperinflation.

There is no evidence available anywhere that I can find which indicates the Fed/USG are printing excessive amounts of cash, as cash levels, which are less than half of what is referred to as the "Monetary Base", have remained relatively stable.

Yet, everybody with any modicum of understanding sees that the Fed/USG are driving the monetary bus right off the cliff and the whole system is soon to crash.

So, Please explain how the entire global banking structure, which is on the verge of collapse, which means that all credit, regardless of issuer, is about to go "!POOF!", like it almost did in 2008, will lead to hyperinflation within the U.S. when then entire structure that supports commerce and trade ceases to exist.

Have you read them? I do understand that back-and-forth discussion, especially among such friendly people, is so much more enjoyable than reading long posts, but I would still suggest the above two as preparational reading.

"So credit dollars continues to function as if they are money in spite of the demand for cash as payment placed upon the government because its' credit is no longer acceptable?

As you conceded, hyperinflation is a process. First, private credit based on dodgy debt will be shunned -- see the worthlessness of MBSs. These can first be rescued by being replaced by debt from an entity with a better credit rating. In 2008, the debt of the GSEs was essentially nationalized, was it not? This saved its value by coverting it to a debt obligation of a more credit-worthy borrower.

The second stage is when debt-gone-bad gets bought for digital base money. This was QEI and QEII. While this new base money exists only digitally for now, it is a promise to print notes from 'the only entity who can print dollars -- the FED'.

This is where we are now.

So agreed -- the Fed has not been 'printing money'; they have been 'promising to print money' by expanding the (digital) monetary base. At this point, it is enough.

Soon enough, we will get past this stage, and the digital 'promises to print' will not be enough, and the real printing will begin. It is a process, so the promises to print will not lose value overnight. But more and more the physical notes will be demanded, and the Fed will oblige.

After this stage will come the point where not even digital 'promises to print' from the Fed will be enough. We are not there yet.

Are you saying that there is no correlative connection between credit dollars and the government's credit?

Not sure of the context of this question, but maybe I can guess what you are asking.

Credit money is 'the people's money'. When the USG sells treasurys to the public, the government is obtaining 'people's money', or credit money. When the government sells treasuries to the Fed in exchange for digital base money, it is getting ... base money, which is specifically the FED's credit based on a promise to print FRN.

So the government's credit can both be connected to 'pure credit dollars', i.e. 'the people's money', or it can be connected to 'fed base-money credit dollars', i.e. 'promises by the fed to print FRNs', depending on who buys the treasuries issued.

Is this about what you were asking?

Are you saying that once a government issues credit into the banking system, as it did with the QE programs, that credit retains its "moneyness" even while creditors are demanding cash from the government that issued that credit?

See the answer above about the process leading to HI.

At the time of the QE programs, creditors were not demanding cash from the government. They are not yet demanding cash now, either.

QE gave the creditors 'credit dollars' (while expanidng the monetary base, but I don't believe that what the creditors received could be distinguished from 'credit dollars', if this makes sense). Still, 'credit dollars' were a huge improvement over 'dollar-denominated MBSs of uncertain performance', and so the creditors went home happy.

It was the MBSs and their like which had lost their 'monneyness', not the 'credit dollars'.

The crisis where 'credit dollars' lose their 'moneyness', and the fed must resue them by printing cash, is not yet here.

If the government's credit is no good, then the banking structure's credit, which spans the entire globe, is no good.

Correct! But we are not there yet. The point where the USGs credit is no good, and it must fund itself with pallets of cash, will be in the teeth of the a bad, bad HI event.

Dollar-denominated credit will be no good.

However, remember that there are other currencies out there. Specifically, the Euro. Euro-denominated credit could be doing relatively OK, even while USD-credit is non-existent. This was the whole reason for the creation of the Euro, after all -- so that the rest of the world would not have to step in to prevent a USD-collapse, since they now have their own money on which to obtain credit.

Again I agree, hyperinflation is a process over time, but it is also a physical currency event, credit cannot drive hyperinflation.

Agree! Physical cash will be the feedback loop that drives the hyperinflation -- once it starts. Not yet.

There is no evidence available anywhere that I can find which indicates the Fed/USG are printing excessive amounts of cash, as cash levels, which are less than half of what is referred to as the "Monetary Base", have remained relatively stable.

Correct, because, much as people like to use the term 'printing money' instead of 'expanding the monetary base' (it is so much sexier), it is the latter term that they normally mean.

But recall that 'expanding the monetary base' means 'expanding the FED's promises to print FRNs'. Depositors ask for cash withdrawals from their local bank branches, who in turn withdraw their reserves from the Fed.

Remember the recent expansion of 'excess reserves held at the Fed', thanks to QE and QEII?

So, Please explain how the entire global banking structure, which is on the verge of collapse, which means that all credit, regardless of issuer, is about to go "!POOF!", like it almost did in 2008, will lead to hyperinflation within the U.S. when then entire structure that supports commerce and trade ceases to exist.

All dollar-denominated credit will go ‘poof’, eventually. Not all at once. First, the credit from less credit-worthy borrowers will lose value. USTs will still be considered ‘safe havens’ (!). Further, credit denominated in other currencies may not necessarily go ‘poof’ along with dollar credit. See, for example, the Euro, or even the Aussie dollar if you prefer.

Again, the whole point of the Euro was to have an alternative, in case the dollar went bust as it is about to do. So ‘the entire structure that supports commerce and trade’, world-wide, will hardly ‘cease to exist’.

Within the US, yes, commerce and trade will slow to a standstill. Vincent’s link to ‘hyperinflation math’ was a good primer into what the results of that are. If economic output grinds to a halt, does the value of money increase or decrease?

[...] Many say, how to defend Euro without much currency reserves? If gold go to many thousands US, what will be used to bid for Euro as defense? I say, these persons will find a problem on their computer screens! You see, the Euro will start as "nothing", no holdings of size, anywhere! The dollar is held as reserves as "the stars in heaven"! It is to say, "the dollar will bid for the Euro", not "the Euro will bid for the dollar"! All currencies will "flow into the Euro for trade". [...]

Hi All, as far as I can see (and pls correct me if I'm wrong) Carl's point of view is almost the same as everybody's except for the end of the story will be like ...

Almost everybody here (including myself) think that the Gvt will try to print their way out, whilst Carl believes that it will not print and that will cause deflation.

Guys, I'm afraid we're stuck there, and unless Carl changes his mind or goes shopping somewhere else this infructuous debate could go on forever (as the rest of us aren't going to become deflationists)

Fear is the main emotional motivator in any currency collapse, just like it is in financial market meltdowns. And as we saw even just last night, the herd can stop on a dime and reverse course 180 degrees overnight, from greed to fear, based on a single news item.

The initiating spark of hyperinflation (currency collapse) is the loss of confidence in a currency. This drives the fear of loss of purchasing power which drives people to quickly exchange currency for any economic good they can get their hands on. This drives the prices of economic goods up and empties store shelves, which causes more panic and fear in a vicious feedback loop.

The printing of wheelbarrows full of cash is the government's response to price hyperinflation (currency collapse), not its cause. This uncontrollable government response happens in some cases, but not all. Let me repeat: The massive printing that first comes to mind when anyone mentions hyperinflation is not the cause, it is an effect, in the common understanding of hyperinflation which is the collapse of a currency.

Stated another way for the specific case of the US dollar; credibility inflation (financial product hyperinflation) leads to consumer price hyperinflation (collapse of confidence) which leads to monetary base hyperinflation (govt. response). This is a concept I spelled out in my three most recent hyperinflation posts:

Just Another Hyperinflation Post - Part 1 Just Another Hyperinflation Post - Part 2 Just Another Hyperinflation Post - Part 3

Before you dismiss my writing on hyperinflation, please take note: After reading these three posts, the last of which led him to All Paper is STILL a short position on gold (also about hyperinflation) last October, Krassimir Petrov, PhD, Economist, Professor and lecturer wrote, "FOFOA is probably one of the very best analysts in the whole world. The more I read from him, the more I am convinced of his vast superiority over most experts and analysts." (http://www.petrovfinancial.com/?p=1014)

FOFOA:One of the things I have found that people have a hard time grasping is that ALL savers will want to be in gold after the transition, even though it won't deliver ANY real gains like we've had over the past decade. This is a difficult concept to wrap one's head around. People seem to think that they are in gold only for the big 30-bagger revaluation and then they'll want to find something else in which to put their little dollar soldiers to work earning a yield. Either that or they imagine that Freegold will be an environment of perpetual real gains for gold holders. It will not.

Freegold will be simple purchasing power preservation, and you'll love it! No gain, but also no risk and no loss. That's what savers need and want. And most of us are savers whether we admit it or not. This is a really big idea we need to contemplate if we don't want to be run over in the end.

Hello, I'm burningfiat and I'm a saver. There, I admitted it ;-)

After thinking about it: Yes, I think I'll still be in gold after the 30-bagger! Will you?

rereading FOFOAs "Schiff: So how is it different from today", I say: Sure, because I dont believe in that 30-bagger, but see no other alternative to "save", other than to hold my "savings" in gold.So the question should be different: Lets say, we already do have Freegold today, would you still be holding gold over stacking thuna cans for a potential collapse? Honest answers?Greets, AD

DP said... "My understanding is Carl does think the USG will print. But they won't do it in time to get ahead of the market's demand, so the wheels will fall off the world."

That's close. Have you read up on electronic trading? That's the speed at which the final leg of this ongoing collapse will occur. Fed's not gonna get ahead of it even if they had the notes already printed and standing by, which they don't.

The threat isn't coming from the USG/Fed, they're just exacerbating the problem. The threat is the TBTF's and that hasn't changed at all.

Carl you obviously aren't here to learn anything. You ignore reality, recent history, and long term history. And you haven't read, can't comprehend, or ignore FOFOA. So why exactly are you here? You are dull and tedious, and I'm done with you.

Carl: Fed's not gonna get ahead of it even if they had the notes already printed and standing by, which they don't.

FOFOA: They've got all those new $100 bills already printed. They could release the new bills at 100:1 on the old bills. Most people don't see this as hyperinflationary. They think of it as "issuing a new currency." So what's the difference between the two? There is NO DIFFERENCE!

Issuing the new $100's at 100:1 would be the same as issuing a $10,000 note. Same exact thing. But you must realize, it's not the notes that are driving the collapse (hyperinflation), it's THE OTHER WAY AROUND.

"Lets say, we already do have Freegold today, would you still be holding gold over stacking thuna cans for a potential collapse?"

If you have gold to hold and you are in freegold as you say, you would simply be a fool to not have used a portion of that gold to make sure you also have tuna and a whole lot more in addition to some of your gold still.(This assumes you live modest.) You should always strive to have some supplies in case of emergency, no?

You wrote- "why is shale gas being produced at all? Natural gas prices have fallen through the roof, and are currently around $2 per thousand cubic feet. "

The same oil companies that are making a killing with over-priced crude also own all the Nat gas. As long as the west is over-paying for crude, it doesn't seem to matter what the price of nat gas is. I work in the oil industry here in Alberta Canada and we do just as much gas work as oil. Its booming here, thanks to false demand driven by monetary policy. Nat gas was $13 in 2007 and $2 now but we still have labor shortages in the nat gas sector.

All these nat gas discoveries are going to eventually drive down the price of crude and will aid in blowing up the IMFS.

A revolution in cheap energy will speed up the need for a wealth reserve par excellence/ultimate reference point as everyone's standard of living rises and untold amounts of wealth gets created.

Thanks for the anecdote about Alberta. Coal seam gas is going nuts here in Australia as well. They're building many LNG trains here as well because we have such a huge surplus over domestic demand for nat gas and CSG.

I don't want to put words in your mouth so if the following question needs to be restated in order for you to answer please go ahead and restate it.

Do you have a timeline for the LNG trade to reach critical mass and provide a competitor to oil?

This quote is from an extract from the May Monthly Bulletin of the ECB. It puts this reserves versus credit growth issue into the clearest possible light. The banks lend first and then the ECB supplies the required reserves. (My emphasis)

From a medium to longer-term perspective, inflation moves in line with broad monetary aggregates. This relationship holds through time, as well as across countries and monetary policy regimes: it is “hardwired” into the deep structure of the economy.

Empirical evidence confirms this relationship also for the euro area. This underpins the prominent role assigned to broad money in the ECB’s monetary policy strategy.......

...The occurrence of significant excess central bank liquidity does not, in itself, necessarily imply an accelerated expansion of MFI credit to the private sector. If credit institutions were constrained in their capacity to lend by their holdings of central bank reserves, then the easing of this constraint would result mechanically in an increase in the supply of credit.

The Eurosystem, however, as the monopoly supplier of central bank reserves in the euro area, always provides the banking system with the liquidity required to meet the aggregate reserve requirement.

In fact, the ECB’s reserve requirements are backward-looking, i.e. they depend on the stock of deposits (and other liabilities of credit institutions) subject to reserve requirements as it stood in the previous period, and thus after banks have extended the credit demanded by their customers.

...Start with Industrial & Commercial Bank of China Ltd., the world’s most valuable bank, at least on paper, with a $238 billion market capitalization. Much of its capital consists of the remnants of bad loans dating to the 1990s, which ICBC now calls receivables.

One such receivable represented about a third of ICBC’s shareholder equity, as of Dec. 31. It was scheduled to start coming due in 2010 but wasn’t repaid, and still sits on ICBC’s books at its original value....

At the end of 2004, before its most recent restructuring by the Chinese government, Beijing-based ICBC said about 21 percent of its loans were nonperforming. Today the same bank, which is 71 percent state- owned, classifies less than 1 percent of its loans that way.

Like I said in a comment earlier in this thread. Restructuring an economy is no easy task at the best of times.

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